Throughout the globe, travel restrictions, event cancellations and sick and self-isolating workforces and consumers are causing problems for financial firms, many of which are now unable to perform contracts in the manner agreed with their counterparties. Some of their contractual arrangements, however, provide an answer.

Along with Brexit and various disasters that our climate emergency is likely to cause, the outbreak of the Coronavirus which started in late 2019 will cause (and has already caused) disruption, delay, added expense and general difficulties and will therefore stand in the way of the performance of many contracts that are in operation in financial services this year. The compliance officer must be cognisant of these problems and plan accordingly.

Parties (and their insurers) will be – and in some cases are – looking for answers to the obvious legal question: when will those events, or similar ones, excuse contractual performance because force majeure clauses exist in them? In this article, we shall consider the current state of force majeure in English law; how several critical events of 2020 might trigger a force majeure; and what parties should be doing to protect themselves from their own – or their counterparty’s – failure to perform in the light of these events.

Ordinary usage of force majeure clauses

Although force majeure as an excuse for failed contractual performance has no automatic application in English law, a force majeure clause of some kind is included in most commercial English law contracts. Such a clause typically suspends or extinguishes a party’s obligation to perform the contract in specific, often so-called ‘emergency’, circumstances. Force majeure clauses are more common in certain types of contracts than others. For instance, they are an important part of most construction and shipping contracts. In financial contracts, they are often also used to suspend any obligation on the part of the lender to advance further funds under a debt facility and as a mandatory prepayment event for the borrower.

Because the concept of force majeure has no legal meaning outside that which is drafted in this-or-that contract, answers to the following questions will depend on the specific drafting of the clause.

• In which ‘emergency’ or other circumstances does the clause apply? Typically, a force majeure clause applies in cases of natural disaster, epidemic, changes in the law and similar designated circumstances.

• Does the circumstance need to prevent performance or only make it more difficult? Clauses may either provide for cases where a force majeure event ‘prevents’ contractual performance, or more widely (for example) ‘prevents, hinders, or delays’ performance.

• How does a party assert force majeure? There may, for instance, be a requirement in the contract’s force majeure clause to give notice as soon as a force majeure event occurs.

Recent force majeure cases

Two significant cases in the last two years have considered force majeure clauses.

Classic Maritime Inc v Limbungan Makmur SDN BHD, Lion Diversified Holdings BHD [2019] EWCA Civ 1102. The case concerned a failure by a charterer to deliver a cargo of iron ore after an accident at the relevant mine. The Court of Appeal held that the clause did not protect the charterer from liability for breach of duty in circumstances where it would not have been able to perform the contract regardless of the accident (as the clause required that the failure to perform had to be 'resulting from' the force majeure event).

Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 Comm. In this case, an oil company failed to carry out drilling due to (i) a moratorium imposed by the Ghanaian government and (ii) Ghana’s refusal to approve the drilling for separate reasons. The High Court held that the force majeure event must be the only effective cause of default to engage the protection of the force majeure clause and added that the defendant’s failure to use reasonable endeavours to secure approval would also have prevented reliance on the force majeure clause in this case.

Appropriate steps for the affected party to take when a force majeure occurs (or is expected) may include writing down the details of the force majeure event and notifying and/or entering negotiations with counterparties. For the non-affected party, re-negotiations may also be advisable but, ultimately, it might have to take legal action to prevent the affected party from relying on the clause.

The Coronavirus, Brexit and the emergency of a changing climate

The Coronavirus has now infected more than 200,000 people throughout the globe and caused more than 8,000 deaths. Everywhere, travel restrictions, event cancellations and sick and self-isolating workforces and consumers are causing problems for businesses, many of which are now unable to perform contracts in the manner agreed with their counterparties. One notable government response has been the production by the Chinese government of ‘force majeure certificates’ which are intended to provide evidence of force majeure events. The certificates have legal effect under Chinese commercial law, but it remains to be seen whether non-Chinese counterparties will recognise them.

In a different sphere, Brexit will also have important implications for businesses this year. These implications may ensue from either Britain’s actual exit from the European Union (which took place on 31 January 2020), or from the end of the ‘transition period’ on 31 December. Although last year’s case of Canary Wharf v EMA showed us that Brexit is rarely likely to frustrate contracts, the broader regime created by force majeure clauses could provide for Brexit to excuse the non-performance of some contracts by that method instead.

A final category of ‘force majeure event’ likely to be seen in 2020 relates to our changing weather and climate – the so-called ‘climate emergency.’ Already in the UK this year, disastrous flooding, linked by many to changes in our climate, has devastated thousands of homes and businesses. A point likely to be argued in future litigation is whether such weather-related events can allow contractors to invoke force majeure clauses as 'natural disasters' or 'acts of God', particularly in circumstances where humans have provably affected weather patterns.

Practical guidance for parties

If an investor or business is worried that it or a counterparty has been affected by any force majeure-type event, it should review any affected contracts (and potentially-affected contracts) as soon as possible, perhaps with help from its lawyers. With regard to signing new contracts, it should endeavour to insert force majeure clauses which provide for its preferred risk allocation in the case of events such as the ones that we have discussed.

Finally, monitoring is always of utmost importance for all businesses and investors. Force majeure events, by their nature, are difficult to predict accurately. As such, it is imperative that businesses should have a good understanding of their contractual landscape, the better to be prepared when force majeure strikes.

* Jumana Rahman can be reached on +44 (0) 20 8036 9394 or at jrahman@cohengresser.com