COVID-19 force majeure

COVID-19 Force Majeure and Frustration

COVID-19 has sent shockwaves throughout the business world. For some businesses the impact has been severe and they will find it difficult or impossible to perform contracts entered into before the onset of the pandemic.

In this blog we provide an overview of how businesses may be able to rely on force majeure or the doctrine of “frustration” so as to avoid liability for failing to perform their obligations as a result of COVID-19.

Contractual Position

If you are working under a contract governed by English law the starting position is that you must perform that contract. So, even if you are affected by COVID-19 you must still perform that contract and if you fail to do so you will be liable. There are two key exceptions to this rule: the operation of any force majeure clause in your contract and the common law concept of frustration.

COVID-19 Force Majeure

Unlike in other jurisdictions, English common law or statute does not recognise force majeure. So if your contract does not contain a force majeure clause you cannot use force majeure as a means to avoid liability for non-performance.

If your contract does contain a force majeure clause then you will need to check it to see how it deals specifically with each party’s rights and obligations. Key factors to consider are set out below.

Is COVID-19 covered?

Assuming COVID-19 is not specifically covered as a force majeure event, check if it is the type of event that would fall under general force majeure wording (e.g. pandemic or similar wording), or whether there has been a government decision or administrative action preventing performance that meets the political interference language which is commonly included in definitions of force majeure.

Should the party that wishes to claim force majeure have guarded against COVID-19?

Check if the contract excludes events that could have reasonably been provided against, avoided or overcome. In the COVID-19 context, the current pandemic is not likely to be foreseeable. On the other hand, parties who elected to enter contracts with reasonable knowledge of the virus’s potential consequences, such as in January of 2020 when the virus began to attract attention in China, may have a more difficult foreseeability argument.

Is COVID-19 the true reason for not being able to perform the contract?

The party that is seeking to rely on force majeure must usually establish that the force majeure event has prevented or hindered it from performance of the contract. This is mostly a factual question but, again, will also turn on the exact wording of the clause. For example, some force majeure provisions require performance to have been rendered impossible, so the burden on, for example, a contractor to show that it could not have sourced staff, equipment or materials from elsewhere will be high. Generally, force majeure clauses are not so generous as to offer relief where services or goods will simply be more expensive to perform or obtain.

Mitigation

The party that is claiming force majeure relief is usually under a duty to show that it has taken reasonable steps to mitigate or avoid the effects of the force majeure event. Check whether being able to rely on force majeure is conditional upon you mitigating the effects of COVID-19.

Notice requirements

Parties will wish to ascertain whether prompt notification is a contractual condition precedent to relief. In that situation, a failure to notify in the prescribed manner will result in a party being unable to rely on the provision. In other cases, a failure to notify will not prevent a party from relying on a force majeure provision and the only consequence will be a potential damages claim (if the other party has suffered a loss). The courts have not always taken a consistent approach to the interpretation of notice provisions, and clearly the safest course of action is to ensure strict compliance with any notice provisions in the prescribed manner and as soon as possible

What are the consequences of establishing COVID-19 force majeure?

In most contracts, establishing force majeure will lead to relief from performance, thereby avoiding the risk of a default termination, and an extension of time to target dates. Commonly, parties bear their own costs arising from any force majeure delay but there are exceptions where compensation may be payable after a certain duration or certain costs are payable from one party to another. Extended periods of force majeure can lead to a right for one or more parties to terminate the contract. If the parties do not wish this to happen, it is important to engage in discussions sooner rather than close to the deadline. It may be preferable for these to be held on a without prejudice basis.

COVID-19 Frustration

In the absence of a force majeure clause, a party to a contract may be able to rely on “frustration”. Frustration is a common law right that allows a party to be discharged from its contractual obligations if a change of circumstances makes it physically or commercially impossible to perform the contract or would render performance radically different from that agreed to when the parties entered into the contract. This test may be satisfied if the commercial purpose of the contract is no longer achievable. Delay caused by COVID-19 could in principle be a frustrating event, depending on the nature of the contract in question and the length of the delay.

The focus will be on the parties’ specific contractual obligations and whether they have ‘radically changed’ as a result of the spread of COVID-19 to the extent that requiring a party to comply with its strict contractual obligations would mean requiring it to do something fundamentally different from that which it originally promised to do. In other words, it will be important to identify the consequences of the pandemic on the parties’ ability to perform the specific contract in question. It is unlikely to be sufficient that circumstances have changed in society generally or that performance of the contract has become more onerous or expensive or even uneconomic.

Consequences of frustration

Frustration discharges a contract meaning that all current and prospective rights and obligations are cancelled. All sums paid by a contracting party before the frustrating event will be repayable, subject to the court’s discretion (broadly) to give credit for expenses incurred or benefits provided by the other contracting party.

If you have any questions or need help with any COVID-19 force majeure or frustration issues please contact Neil Williamson or call us on 0203 637 6374.


EM Law Liquidated Damages

Liquidated damages – are they payable even when the contractor does not complete the works?

For this reason, the parties to these contracts often pre-determine the level of damages to which a party is entitled in the event of certain specified breaches occurring. These pre-determined damages are known as liquidated damages and are often triggered when there is a failure to complete works within a specified time. In this blog we take a look at the recent case of Triple Point Technology Inc v PTT Public Company Ltd and consider whether a liquidated damages clause can survive the termination of a contractor’s engagement.

Liquidated damages - current position 

The question of whether or not a liquidated damages clause will trigger a payment obligation when a contractor does not complete works has been disputed by the courts on numerous occasions over the past few years. The conventional position, derived from earlier case law, is that an employer will be entitled to claim liquidated damages for delay up to the point of termination but must bring a general damages claim for any delays which accrue after that date. The logic is that, after termination, the contractor loses control of the time for completion, especially if another contractor is employed to complete those works. However, the cases of Halland another v Van Der Heidenand GPP Big Field v Solar EPC Solutionsmuddied the waters by concluding that an employer could claim liquidated damages for the period after termination. So where do we stand now? The recent Court of Appeal case of Triple Point Technology Inc v PTT Public Company Ltd has offered some much needed clarity on this issue.  

Triple Point Technology background 

In 2012 Triple Point Technology entered into a contract with PTT Public Company Ltd for the supply of a software system. Under the contract, Triple Point were to provide the new software system in two phases, with each phase having multiple stages of work. In the first phase, the new CTRM System would replace PTT’s existing system, and in the second phase the new CTRM System would be developed to accommodate new types of trade. The contract also contained a liquidated damages clause, referred to as Article 5(3), which stated:

“if contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, the contractor shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…” 

In February 2013 Triple Point Technology began working on the project however the first two stages of phase 1 were completed 149 days late. Nevertheless, Triple Point submitted an invoice in respect of this work, which was duly paid by PTT. Triple Point then submitted further invoices in respect of work which had not yet been completed, on the basis that the payment dates for such work had passed. However, PTT refused to make such payments and in May 2014 Triple Point Technology suspended work. By February 2015 PTT had terminated the CTRM contract and Triple Point technology had commenced proceedings in the High Court. 

High Court decision

Following termination of the contract, Triple Point Technology commenced High Court proceedings against PTT for the sums it said they were due. PTT counterclaimed for damages for delay and damages upon termination. In the High Court, Mrs Justice Jefford dismissed the claim and awarded PTT just under $4.5 million of which just under $3.5 million represented liquidated damages for delay pursuant to Article 5(3) of the contract. As the further milestones had not been reached, Triple Point Technology were not entitled to further payments. Triple Point were therefore not entitled to suspend work in May 2014 and were accordingly in repudiatory breach of contract. 

The appeal decision 

Triple Point Technology appealed Mrs Justice Jefford’s decision. Among other grounds of appeal, Triple Point Technology argued that Article 5(3) should not be engaged because it should only apply when work was delayed, but nonetheless completed and then accepted by the employer. In this case, the work was delayed and the contract was subsequently terminated. 

The Court of Appeal held that there were three different approaches towards clauses providing liquidated damages for delay, namely: 

  • The liquidated damages clause would not apply at all (as in the case of British Glanzstoff manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd);
  • The liquidated damages clause would only apply until the point of termination (as in the case of Greenore Port v Technical & General); or
  • The liquidated damages clause would continue until the second contractor achieved completion (as in the case of Hall and another v Van Der Heiden).

In the court’s view, the question of whether the liquidated damages clause ceased or continued to apply up until termination, or even beyond that date, depended on the wording of the clause itself and there was no blanket rule that applied by default. Relying heavily on the reasoning in British Glanzstoff manufacturing, Sir Rupert Jackson stated that there was “no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”

Sir Rupert Jackson also held that Article 5(3), which focused specifically on delay between the contractual completion date and actual completion, had no application in a situation where a contractor never completes the work. It followed that PTT was entitled to recover liquidated damages of $154,662 in respect of Triple Point Technology’s 149 day delay and would have to bring a claim for general damages in respect of any other delays. Although Sir Rupert Jackson emphasised that every case would turn upon the wording of the clause in question, he did cast doubt on the previous decisions in Halland GPP

Liquidated damages - concluding thoughts

The case of Triple Point Technology v PTT Public Co illustrates how the law in relation to liquidated damages is far from settled. Parties to construction or software contracts should think carefully about when they want their liquidated damages provisions to apply. Clear and effective drafting is therefore key to ensure that you do not encounter any surprises when bringing a claim for breach of contract. If you have any questions about liquidated damages clauses in construction contracts or software agreements please contact Neil Williamson.