Routes to Relief on Both Sides of the Atlantic – Frustration and Force Majeure under US and English Law
COVID-19 presents a unique and, for most parties, unprecedented challenge – a pandemic that has resulted in a global public health crisis and significant restrictions on global trade and labor, the repercussions of which continue to evolve on a daily basis. The second article in our series on force majeure takes a step back to look at the concept of force majeure more generally from a U.S. and English law perspective.
Force majeure is a complex contractual remedy, subject to myriad pertinent facts specific to the context in which it arises. Generally, force majeure provides a potential route to complete or partial relief from performance and, less commonly, payment obligations under the relevant contract. Before claiming relief for force majeure, or responding to a counterparty claim for force majeure relief, parties should obtain specific legal counsel to assist in evaluating the merits and drawbacks of a particular claim, particularly as it may relate to obligations in other, related contracts.
Force Majeure and Frustration under English Law
Force majeure is not implied into contracts under English law and must be specifically contemplated by the language of the contract. There are a number of prerequisite hurdles that must be cleared in establishing the occurrence of a force majeure event, including that the event in question must prevent a party from performing its obligations, as opposed to simply requiring the affected party to adopt a more complex or expensive method of performance, i.e., performance by such party must be made substantially more difficult, or indeed, impossible.
In addition, the party seeking to rely on the force majeure provisions in a contract bears the burden of establishing that the delay or failure in performance of its obligations (a) is due to circumstances beyond its reasonable control, (b) could not have been avoided or mitigated by the exercise of due diligence and reasonable efforts, and (c) that the nature of the force majeure event has had the effect specified in the relevant contract. Instead of, or in addition to, defining a force majeure event, many force majeure provisions may exhaustively or non-exhaustively list examples of force majeure events, such as extreme weather events, actions by governmental authorities or natural disasters, and/or list examples of events that are excluded from being force majeure events.
Whether or not the COVID-19 pandemic will trigger relief under the force majeure provisions to which a party is subject is a fact and context dependent question. To the extent that the aforementioned list enumerates quarantine, pandemics, epidemics, or outbreaks of disease, it may qualify. However, whether or not a party can successfully claim relief for force majeure will depend upon close analysis of the force majeure provisions of the relevant agreement, to ensure that the relief sought is contemplated by the contract, the timing of the occurrence of the force majeure event does not impact the claim, and that any requirements for making a claim, including timing stipulations and the form and content of notice obligations, are met.
As discussed above, where a contract does not contain force majeure provisions, they will not be implied by the English courts. In such circumstances, a party may seek relief from performance pursuant to the doctrine of frustration. The route to relief is significantly more challenging, as the result of a contract being frustrated is that it is automatically terminated. A party seeking to rely on the doctrine of frustration will need to establish that a supervening event has occurred, that is not otherwise provided for in the contract (for example, through a force majeure provision), which alters the fundamental obligations of the affected party so significantly beyond what could reasonably have been contemplated when the parties entered the contract that it would be unjust to compel performance. English courts apply the doctrine of frustration narrowly, and a party will not be successful in a claim that a contract has been frustrated merely because its obligations have become more challenging or expensive to perform, or where the supervening event in question was reasonably foreseeable.
Force Majeure and Impossibility under US Law
Treatment of force majeure provisions under U.S. law, taking New York as an example, is broadly similar to treatment under English law. Where a provision contains a list of examples, as described in the foregoing section, a court will typically limit events that are sufficient to excuse performance to such list, and if there is broader language, e.g., “including but not limited to,” will generally take a narrow interpretation and restrict such expansion to events similar or the same kind or nature as those listed.
A key distinction between English and New York law, however, is that New York law also imposes a threshold foreseeability component, i.e., whether the event in connection with which relief is being sought was reasonably foreseeable by such party at the time the contract was entered into, or at the time the event occurred. Generally, a force majeure defense is not available if the event could have been anticipated and provided for in the contract.
New York law also recognizes an equivalent doctrine to frustration, namely the doctrine of impossibility. This doctrine is applicable where the subject matter or means of performance of a contract is destroyed, making it impossible to perform. The relevant event must have been unforeseeable and one that the parties could not have provided for in the contract. As with the doctrine of frustration, New York courts apply the impossibility doctrine narrowly, and in addition, will typically not relieve a party of liability where it was negligent in contributing to the occurrence of the event in question.
Key considerations when analyzing force majeure provisions
If not already done, now is the time to conduct a review of all commercial, vendor and supply contracts to ascertain what your obligations are and whether you are entitled to any performance or payment relief, and to assess the relief that your contractual counterparties may have. Key considerations when analyzing force majeure provisions, which should be reviewed in detail with your legal counsel, include:
- Whether the concept of epidemic or pandemic is identified as an included or excluded event;
- Whether the concept of change in laws is identified as an included or excluded event;
- The timing component as to when the force majeure event needs to have occurred;
- Whether force majeure events directly affecting your contractual counterparties, but not directly affecting you, are included;
- Mitigation obligations on either party;
- Notice obligations, including timing, form and content of such notices;
- Whether the relevant force majeure event was reasonably beyond the claiming party’s control at the time the contract was entered into, or at the time the force majeure event took place;
- The governing law of the contract and whether there are any statutory force majeure rights under that governing law in addition to the contractual provisions (for example, in civil law jurisdictions, including China);
- The jurisdiction of your contractual counterparty and the circumstances affecting that jurisdiction; and
- In the case of contracts governed by the laws of the State of New York, whether the relevant force majeure event was reasonably foreseeable at the time the contract was entered into, or at the time the force majeure event took place.
The exact nature and potential risk exposure in the event of coronavirus affecting a party’s ability to perform, and the potential relief and exposure under existing force majeure provisions in the relevant agreements, will vary from agreement to agreement and jurisdiction to jurisdiction. The consequences of incorrectly invoking force majeure may result in contractual termination, loss of entitlements or relief, or damages obligations (liquidated or general), so parties should seek advice before invoking their force majeure provisions or if a counterparty has invoked force majeure against them.
Often, the evaluation of the risk exposure and available remedies will involve a multi-jurisdictional analysis, and care should be taken in responding to force majeure claims as the contractual and commercial puzzle may not be straightforward. One useful way of keeping track of rights and obligations in the context of force majeure is to prepare a matrix setting forth all of the force majeure provisions in key commercial contracts, to include both the circumstances where the applicable party may be entitled to give notice of force majeure, and the circumstances in which the same party may expect to receive notices from their counterparties. Finally, despite the observed disruptions, new contracts are being entered into on a daily basis and careful consideration should be given to the way commercial counterparties approach the negotiation and drafting of new force majeure provisions in the current environment.
Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.