At the time of writing, we are now into week ten of lockdown and, by now, it is likely you will have read an article or two about the possibility of using force majeure to excuse non-performance of obligations due to Covid-19.
However, whilst the message about the relevance of force majeure clauses to the current situation has stuck in the business community, just like the Prime Minister’s new “stay alert” slogan, there has been some confusion as to how to apply the principle of force majeure in individual situations.
Force majeure in the logistics sector, when driven by a crisis such as the Covid-19, is typically going to arise in the following circumstances:
- a reduction in customer volumes (in a number of instances, such reduction being significant and extending to 95%);
- limited or constrained resource required to provide the services;
- economic constraints (e.g. an inability to cover costs due to a decrease in volumes).
If we look back to the fuel price protests in 2000, invocation of force majeure was typically focused on limited resource; third party logistics providers (“3PLs”) simply did not have the fuel to meet their commitments. Consequently, force majeure was often inescapable and clear-cut. However, in the current environment the situation is less black and white.
Take, for example, a 3PL that has a contractual obligation to make a daily delivery to post codes in the UK. This type of network service is highly volume dependent, resource intensive and service sensitive.
Because of the Covid-19 and its impact on the economy, movement and resource availability, the challenges such a network may face are likely to derive from:
- limited resource, in relation to self-isolation and furlough;
- constrained resource, in terms of social distancing measures;
- inability to cover costs, driven by loss of volume.
On the first issue, limited resource, there may be multiple impacts: a reduction in warehouse staff available to load vehicles may slow down the operation, or the reduced availability of HGV drivers may force reduced delivery frequencies. In any event, limited resource is likely to excuse, or invoke a force majeure event, in relation to suspending contractual obligations on service levels.
The second issue, constrained resource, is going to have a similar impact to limited resource. Where staff need to follow social distancing measures or additional safety protocols, then there is likely to be an impact on operating times and, consequently, this may drive the same outcome as limited resource.
It should be noted that limited and constrained resource may not only impact the 3PL’s contractual commitments, but also the client’s contractual obligations to the 3PL. In many contracts, the client may be obliged to provide information, such as volume forecasts or schedules and, due to resource limitations, this may become problematic. In this scenario it may be the client, and not the 3PL, that seeks a suspension of obligations.
The third issue, an inability to cover costs, can present as an issue with either the client or the 3PL and is likely to be one of the biggest challenges in the current environment.
As the economy has rapidly reduced during the lock-down period, many clients are seeing a massive reduction in sales, and the resulting reduction of volume in their logistics network. Where the client is committed to volume guarantees or fixed costs, they may no longer to be able to support their fiscal contract obligations to maintain the service. Conversely, where there is no client commitment to minimum volumes or fixed costs, then it may be the 3PL which is unable to support their own fiscal obligations.
Any one of the above issues, or potentially a combination of all of them, may lead a 3PL or its client to seek to invoke force majeure. However, in the following article we will explore why it may not always be possible to claim force majeure in all the circumstances set out above.
What exactly is a force majeure event under English law?
Under English law, there is no definition of “force majeure”. This means that:
- the parties to a contract must define what a force majeure event is, if they want to be able to rely on force majeure to excuse them for any non-performance of their contractual obligations;
- what constitutes a “force majeure event” will therefore vary from contract to contract, depending on the definition the parties agree on.
It is likely that Covid-19 itself would constitute a force majeure event, either because the contractual definition of “force majeure event” contains an explicit reference to “epidemics or pandemics” or a more generic reference to “events beyond a party’s reasonable control”.
However, it is important to assess the extent to which Covid-19 is really preventing or delaying a party from performing their obligations under a contract.
It has always been the case that a change in economic or market circumstances, affecting the profitability of a contract or the ease with which a party’s obligations can be performed, is not regarded as being a force majeure event.
Despite it being earmarked as a key industry during lockdown, many companies in the logistics sector are experiencing financial hardship at this time and are finding it harder and/or more costly to continue to honour their contractual obligations. Some are seeking to use the force majeure clauses in their contracts, particularly those which are affected by a reduction in volumes and have therefore become uneconomic.
As a customer, you may have been approached by your logistics provider to say that it can no longer afford to store your goods at its premises and therefore wishes to terminate the contract for force majeure. Contrastingly, some customers may be seeking to rely on force majeure to cancel their logistics contracts, due to their logistics providers having to increase the costs of their services. In both cases, it is highly likely that Covid-19 will have triggered the change in circumstances. However, if the effect of Covid-19 is that it has simply become more costly or more onerous for a party to perform its contractual obligations, this does not entitle that party to claim force majeure and down tools. In short, force majeure cannot be relied upon to get out of contracts which have simply become less commercially viable.
Once you have identified that a force majeure event is preventing or delaying the performance of your contractual obligations, you will need to notify the other party of this before you can rely on the provisions of the force majeure clause. Businesses should take care to review and comply with the provisions in the force majeure clause around notice, to ensure that they serve notice within any requisite period of time and provide sufficient information about the force majeure event.
What if you don’t have a force majeure clause in your contract?
Force majeure is contractual; if it is not provided for in the contract it will not be available (and will not be implied). If a contract does not contain a force majeure clause, then a party seeking relief from its contractual obligations due to a force majeure event would have to attempt to rely on the common law doctrine of frustration.
The doctrine of frustration allows for the parties to be discharged (without liability) from a contract when something happens after a contract has been entered into which:
- renders it physically or commercially impossible to fulfil the contract; or
- transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
As can be expected from the terminology used, it is very difficult to prove that frustration applies. There are few cases where it has been successfully argued that it is “impossible” to perform the contract or that the contract has been changed into something “radically different”. Some of these limited examples include:
- destruction of the subject matter of the contract;
- unavailability of the subject matter;
- a change in law makes the performance of the contract illegal; and
- the cancellation of an expected event.
Assuming a force majeure event has occurred, what are your obligations?
Many suppliers think that once they have successfully argued that a force majeure event has taken place, then they no longer need to try to perform their obligations until the force majeure event no longer applies. This is not the case.
A party relying on a force majeure clause will always be under a duty to mitigate (regardless of whether this is expressly mentioned within the force majeure clause). Specifically, the court requires that you use “reasonable steps” to mitigate the impact of a force majeure event.
If you fail to mitigate, you may not be able to rely on the force majeure clause in your contract. It is therefore important to attempt to work around a force majeure event and not treat it as a silver bullet for you to avoid performing your obligations.
In respect of Covid-19, on a practical level, parties should consider:
- continuing to search for ways to limit the impact of Covid-19 on their operations and their ability to perform their contractual obligations;
- jointly approaching end customers to modify service level agreements and/or agree alternative ways of working in order to avoid force majeure;
- keeping an audit trail of how they and the other party are dealing with the situation and what attempts to mitigate have been made;
- maintaining an open and consistent dialogue with the other party so that the impact of Covid-19 can be assessed on an ongoing basis and the success of and attempts to mitigate can be tracked; and
- jointly agreeing what ‘triggers’ need to occur in order to resume expected service and assign these triggers to a review timetable, ensuring supporting data is available and accurate.
Many customers assume that they do not have to continue to pay for ongoing services whilst a force majeure event applies (even where they are relying on force majeure). Again, this may not be the case.
Where a customer is required to pay fixed charges for ongoing services (for example, the continued storage of goods in a warehouse) such charges will continue to be payable throughout the force majeure event.
Even if the overall price paid by the customer is variable, there could be elements of this which are fixed and therefore continue to be payable during a force majeure event. Similarly, customers may be required to order minimum volumes of services each month/quarter under a contract and this obligation would continue during any force majeure event.
Customers (and 3PLs) should review the wording of their force majeure clause to see whether the obligation to pay remains, notwithstanding the general principle that parties are not liable for any failure to perform or delay in performing their obligations during a force majeure event.
What happens once the force majeure event is over?
Most force majeure events are temporary and will come to an end – it is certainly hoped that this is the case with Covid-19.
Some force majeure clauses entitle a party (often the unaffected party) to terminate a contract where the force majeure event continues for a specified period of time. Parties should review their force majeure clause to see whether such a termination right exists under their contract, after what period of time such termination right can be exercised and on what basis the contract will be terminated; in particular, whether it will be considered to be an “at fault” termination or with neither party having liability to the other.
Some other force majeure clauses might specify that if a force majeure event continues for a specified period of time then the contract will automatically come to an end, without the need for either party to serve notice. In such cases, unless the parties agreed a variation to the contract, the contract would terminate and neither party would be expected to recommence performance of their obligations once the force majeure event had ended.
Assuming the contract has not been terminated (either automatically or by one party serving notice to terminate to the other) once the force majeure event has ended, the contract will have to pick up where it left off. Of course, the key question is within what time frame can you expect a party to perform their obligations after the force majeure event has ended.
This has the potential to be a heavily debated issue and will depend on:
- the wording of the force majeure clause;
- the type of obligation that has been suspended; and
- the discussions between the parties whilst the force majeure event is preventing/delaying performance.
A force majeure clause should specify what happens to a party where it is unable to perform its obligations due to a force majeure event. Usually it will state that either:
- Option 1: the party’s obligation is extended for the duration of the force majeure event; or
- Option 2: the party’s obligation is extended for a reasonable period of time.
Where Option 1 applies, you can choose to take a strict/literal interpretation of the clause. For example:
- where a 3PL is required to deliver goods within 20 days of an order being placed, and the force majeure event takes effect 15 days into this delivery period, a strict/literal interpretation of the force majeure clause would be that the 3PL has 5 days to deliver the goods from when the force majeure event ceases to apply.
- where a customer is to provide a 3PL with continuous access to its premises in order for that 3PL to perform its services, a strict interpretation of the force majeure clause would be that the customer must provide such access from the first working day onwards after the force majeure event ceases to apply.
Of course, where Option 1 applies and the obligation is to deliver goods and/or services on/from a specific date which has subsequently passed, a strict/literal interpretation of the force majeure clause is less helpful in trying to determine when the other party should begin to perform their obligations again.
- if a 3PL agreed to deliver goods on 10th April but was unable to do so due to a force majeure event, it seems unreasonable to expect them to be able to deliver the goods on the first available date from when the force majeure event ceases to apply.
- if a customer agreed to provide a 3PL with access to its premises services from 1st May but was unable to do so due to a force majeure event, it seems unreasonable to expect them to have everything in place in order to be able to immediately provide such access from the first available date from when the force majeure event ceases to apply.
In such cases, or where Option 2 applies, you will have to assess when would be a reasonable time for the other party to begin to perform their obligations again. This will depend on the facts of the case, the nature of the other party’s obligations and what position the parties find themselves in after the force majeure event has ceased to apply.
One way to reduce the risk of a dispute on this issue and provide greater clarity as to what would constitute a reasonable period of time for the other party to recommence performance of its obligations, is to ensure there is a consistent dialogue between the parties during the force majeure event. This will ensure that the parties discuss:
- ways in which the defaulting party could potentially continue to perform its obligations in spite of the force majeure event; and/or
- if performance is truly impossible, how and when the defaulting party will begin to recommence performance of its obligations once the force majeure event is lifted.
Anything which is agreed as part of such discussions should be documented and, if necessary, a variation to the contract should be agreed.
Over the coming months, force majeure is likely to be invoked under a great many contracts and not just in the logistics sector. It will be important for those businesses involved to be able to identify when a force majeure event has actually happened and to know their rights to invoke and be aware of their ongoing responsibilities during any period where the parties are unable to perform their contractual obligations, so that the devastating impact of Covid-19 is managed and mitigated as far as is possible.
If you are in the logistics sector and would like more information about how Covid-19 could affect your business, please contact:
- Paul Trudgian on 0121 517 0008 or visit his website at paultrudgian.co.uk
- Wright Hassall LLP on 01926 732512 or visit their website at wrighthassall.co.uk