When we originally published this article in April we used the term “potential” in respect of a second wave of Covid-19. Back then many countries were contemplating an easing of Covid-19 lockdown restrictions following a downturn in cases, and a second wave was discussed as a possibility. In the six months since, we have seen case numbers go up and down at different points in different locations around the globe, and now Europe (including the UK) is experiencing the reality of a second wave. As a consequence we are seeing the re-imposition of restrictions.
At the time of writing, in the UK, there has been no return to the full lockdown of the spring but a range of measures have been introduced often on a localised level to try and restrict the spread of the virus.
The second wave has important implications for contracting parties, many of whom have already been affected by a force majeure event related to the first wave of the Covid-19 pandemic and some of whom may still be in a force majeure situation under their contracts.
Contracting parties are now finding themselves in a range of situations:
- in some cases, parties may have been able to resume full contractual performance as the initial restrictions were lifted and the initial period of force majeure relief ended, but then find that the re-imposition of restrictions affects their contractual performance in a different manner and to a different extent;
- in other cases, parties may not have been able to resume performance in full, and now find that the new restrictions further affect their ability to perform meaning that they need to assess whether they need to give notice of a new force majeure event;
- others may not have previously sought force majeure relief but may find that the new restrictions affect their performance so they will be seeking force majeure relief for the first time.
Whatever the case, it is essential for parties to consider their current situation, how that situation may evolve in light of further restrictions and what they need to be doing at each stage to ensure that they obtain the best contractual protection available.
Although many jurisdictions have statutory requirements in relation to force majeure, this article considers the position where force majeure is solely a contractual concept, as is the case in the UK and other common law jurisdictions. In those jurisdictions, in broad terms and subject always to the actual wording used, force majeure provisions will typically excuse one or more parties from performing their contractual obligations if they are prevented from doing so by circumstances outside their control. The following requirements must generally be met in order to gain relief from performance:
- The occurrence of an event beyond the parties’ reasonable control that falls within the term “force majeure” in the contract. The term is often defined by reference to a list of categories of events, which may include an epidemic or pandemic, a change of law or regulation, or an act of government. It could be a closed list, contain sweep-up wording to cover other similar events, or otherwise be a non-exhaustive list.
- The event has affected the party’s ability to perform the contract. The relevant test will be set out in the contract, but will typically require that the force majeure event has prevented, or perhaps hindered or delayed, performance of “any” (often referred to as “partial force majeure”) or sometimes “all” of their obligations under the contract.
- The party could not have avoided the impact of the event itself or its consequences by taking reasonable steps.
- The party claiming relief has satisfied any notification requirements in the contract.
- Often there will be express obligations on parties to take reasonable steps (sometimes phrased as a “best endeavours” or “reasonable endeavours” obligation) to mitigate the impact of the force majeure event (eg by resequencing work, implementing business continuity plans, making adjustments within the supply chain, etc).
Dealing with the second wave of restrictions
Second force majeure event: As new restrictions are imposed, parties should consider whether those restrictions prevent them from performing their contractual obligations and whether the restrictions or the underlying cause fall within the scope of force majeure relief in their contract. The existence, and specific terms, of any right to terminate for long-term force majeure should also be considered, as some termination rights arise when there are multiple periods of prevention of performance due to the same notified force majeure (see further below).
Parties should also consider whether other provisions might apply, such as change of law, price reopeners or cost sharing. Obviously the application and operation of any such clauses need to be carefully considered but, if relevant, they could provide an alternative source of relief including, in some cases, more generous relief than may be available under a force majeure clause.
Impact/causation: As noted above, contracts commonly specify how the force majeure event has to impact performance before relief can be claimed, often using one or a combination of “prevent”, “hinder” and “delay”.
Just as the trigger for a second period of force majeure relief may not be the same as the trigger for the initial period, the impact may not be the same in a subsequent period. For example, should the contract in question require that force majeure relief is only available if performance of “all” obligations are “prevented” by force majeure, if only some obligations are now affected, and possibly merely hindered, then force majeure relief will not be available. The affected party must consider these issues and reflect them correctly in any notification of a second force majeure period.
Most importantly, the failure to perform must be caused by the force majeure event in order to give rise to relief. In order to benefit from relief due to the impact of the second wave of Covid-19 infections and restrictions, the affected party will need to show that it could not reasonably have protected against the impact that a second wave and any related governmental restrictions might have on its performance under the contract.
Given that scientists have been warning about the likelihood of a second wave for a number of months, companies should be able to show they have taken reasonable steps to avoid, or at least mitigate, the impact of new restrictions on their contractual performance. Merely relying on the same steps that were taken to avoid the impact of the first wave of Covid-19 pandemic is unlikely to be sufficient, and could lead to allegations that the cause of a party’s inability to perform its contractual obligations is, in fact, its lack of preparation rather than the force majeure trigger.
The steps that a party should have taken in preparation will depend very much on what was reasonable in the circumstances, for example:
- The availability of materials and other resources necessary for performance of the contract during the period following the relaxation of initial restrictions (how fast factories were able to ramp up, start producing, start shipping), and the ability to stockpile such materials before the re-imposition of restrictions.
- For supply contracts, if the contract permits supply from any (rather than a particular) source, the extent to which a party could have identified and changed to a source of supply likely to be less vulnerable to a second wave.
- In the context of long-term operation and maintenance contracts for properties and facilities, the possibility of rescheduling outages and maintenance activities to undertake operation-critical maintenance before the second wave hit.
- The ability of the affected party to change operating practices, train more staff, adjust working conditions to facilitate social distancing, etc.
Notification: Parties impacted as a result of the second wave of Covid-19 cases and associated restrictions need to ensure that they continue to comply with the notice provisions in their contracts, which are commonly drafted as conditions precedent to obtaining relief. Note that some notice provisions require notice to be given within a number of days following the occurrence of the force majeure event, rather than from when performance is affected by the event.
Even where a party has not been able to resume performance from the initial force majeure event before the introduction of second wave restrictions, it will still need to re-assess its notification obligations. It may well be that the prudent course of action is to issue a new notice to reflect the fact that it is being prevented by additional or other matters, even if in practice the impact is the same.
Notifying parties should also consider whether, from a practical point of view, they should serve notice in a number of ways. For example, the contract notice provisions may require notice to be sent to an office address, but in reality it may be that no-one will be working in the office because of local restrictions. In such circumstances, as well as sending the notice to the stated address in order to comply with the contractual requirement, parties should take practical steps to bring the notice to the attention of their counterparty, for example by sending an email copy to key personnel.
Mitigation: As noted above, even if it is not possible to avoid the force majeure event having the relevant impact on performance, the affected party will typically be under an ongoing obligation to take reasonable steps to mitigate that impact. Again, what is reasonable will be considered against the circumstances at the time. An obvious response might be that the affected party would be expected to take the same or similar mitigation measures as with the first wave (which might indeed have been none in some circumstances). However, the following should be borne in mind:
- Given that this is a second wave, the circumstances might be such that the affected party is (or should be) able to implement mitigation measures faster and more effectively than with the first wave.
- The range of options that need to be explored now could well be different from those in the first wave, depending on the extent of the restrictions imposed and the circumstances of the affected party – both of which could differ significantly from the first wave.
Termination for multiple periods of force majeure: Some contracts provide for termination in the event of multiple periods of force majeure preventing performance for an aggregate number of days. Careful consideration of the wording used will inform whether this right is available for any number of different force majeure events, or if it only applies for multiple periods of prevention due to the “same notified force majeure”. If the latter, while the overarching cause could be seen as the Covid-19 pandemic, there may be scope for debate as to whether a second period of force majeure relief is in fact due to the same force majeure event as initially claimed, and therefore counts towards the termination trigger. As with the exercise of any contractual termination rights, any party in such a position should consider its options carefully and take legal advice before exercising the right.
If the right is not exercised properly or if it is later found that the force majeure clause did not apply, the purported termination could be considered a repudiatory breach of contract (under English law) which could entitle the innocent party to either affirm or terminate the contract and seek damages.
What actions should companies take now?
As we advised in April, parties should have been preparing for a possible second claim for force majeure relief in the event of a second wave of the pandemic and resulting restrictions.
Contract audit: As force majeure is a contractual concept, being fully aware of the provisions contained in the relevant contracts is critical. In all likelihood, parties have already conducted an audit of their contracts as part of their initial response to Covid-19 and the related restrictions or as part of their preparation for a second wave. If not, now is the time to do it. Parties should consider each contract individually and bear in mind that the provisions may vary from contract to contract, in terms of the trigger events, the extent of the impact required before relief can be claimed, the notification requirements and specific provisions around mitigation, termination rights and the ending of force majeure relief.
Preparation: As noted above, a failure to have planned for the impact of new restrictions could result in force majeure relief being unavailable. To the extent that they have not already done so parties should consider what steps they can take to increase the resilience of their operations and implement work-arounds to deal with the new restrictions and any increased restrictions that may be imposed.
Collaboration: Depending on the circumstances, including the nature of the relationship that a contracting party has with its counterparty, it may be worth taking a collaborative approach to the second wave of restrictions and having discussions around alternative ways of performing the contract and what mitigation can be put in place – while considering carefully before waiving any contractual rights.
Documenting steps taken: Even if, in reality, there is a limited range of options available to avoid or mitigate the impact of the second wave, parties should document what steps they have explored, what steps they have taken and the reason for dismissing other steps. This will be vital evidence to demonstrate that they have taken the necessary steps to avoid a force majeure event having an impact on their performance and, if such an impact cannot be avoided, that they have satisfied the mitigation requirements.
Maximising privilege protection: At the same time, parties should take care to avoid creating any unhelpful documents which may have to be disclosed in any subsequent legal proceedings. To the extent that parties are seeking legal advice on their position or preparing for any litigation or arbitration that may be contemplated, appropriate steps should be taken to maximise the protection of legal professional privilege.
Dealing with claims for relief: Counterparties who are receiving claims for force majeure relief in the current circumstances should carefully consider them in light of the above considerations. Where there is an existing agreement as to how to address the current circumstances, consider whether it can, and indeed should, be extended to cover the second wave. It may be that the current situation requires a different arrangement.
New contracts: Any contract entered into now should deal expressly with the possibility of Covid-19 related restrictions having an impact on performance, rather than relying on a general force majeure clause for protection.
Dealing with force majeure relief when restrictions are lifted
The wording of the contract is key in assessing when force majeure relief ends. Commonly the contract will provide that force majeure relief will continue only for so long as performance of the contract is prevented (or hindered or delayed).
There will inevitably be a difference of views as to when the impact has ended and, in the case of partial force majeure relief, at what point individual obligations were no longer affected. Parties benefitting from force majeure relief, whether that be as a result of the first or second wave of restrictions, should be constantly monitoring the impact that the force majeure event has on their ability to perform the contract so that they can be ready to resume performance as soon as that impact ceases. A failure to do so could result in a party being in breach of contract for failure to perform once the period of force majeure relief ends.
It may be that certain second wave restrictions are for a limited period, so parties who are close to a situation where they, or their counterparty, are entitled to terminate the contract for prolonged force majeure should take particular care in this situation. Such termination rights are commonly tied to the length of time that a party is prevented, hindered or delayed in performing its obligations under the contract, so again the focus would be on when the affected party was no longer affected by the Covid-19 pandemic. Termination due to long-term force majeure close to the point at which the impact ended, eg the lifting of the government restrictions, is likely to be challenged (and, indeed, could give rise to a claim of repudiatory breach of contract entitling the other party to seek damages for wrongful termination). The party terminating in those circumstances should ensure that it gathers strong contemporaneous evidence justifying its actions.
This is an updated version of our blog post published on 27 April 2020.