In light of the ongoing impact of COVID-19, we have already provided a series of articles and other material on what is meant by force majeure and frustration but if a business does decide it needs to invoke force majeure (assuming your contract includes provisions allowing you to do so – and please see our previous commentary about this), how should it go about it?
Simply giving notice that a force majeure event has occurred is not enough for a party to make use of it. The courts have set out a number of guiding principles which must be followed – this article summarises how businesses can ensure that these are met and avoid getting into difficulties when attempting to declare that a force majeure event has occurred.
The key issue to be aware of is that if a party declares that a force majeure event has occurred, it must to take steps to mitigate the impact of that event, which is highlighted in the recent case of 2 Entertain Video Ltd & Ors v Sony DADC Europe Ltd [2020] (and we have commented on this below).
Simplistically, how can a business demonstrate that it has taken those steps?
The key guidance was given by the courts in the case of Channel Island Ferries Ltd v Sealink United Kingdom Ltd [1988] where the court stated that if a party wants to rely on the force majeure clause in a contract it will firstly have to establish that the event is actually covered by that clause but secondly (and critically) it will have to demonstrate that it has “…taken all reasonable steps to avoid its operation or mitigate its results.”
On this basis, to get the benefit of a force majeure clause a party has to take “all reasonable steps”. This is a pretty subjective requirement (and as is always the case, this will be dictated by the particular circumstances) but there has been something of a steer from the courts on this topic, mainly in cases involving shipping:
- In the Channel Island Ferries case which we mentioned above, the defendant was required to charter two specific boats but failed to do so as a result of what it claimed was a force majeure event. However, not only did they fail to charter the specified boats, but they also did not try to charter any replacements – as a result, the court found that the force majeure clause could not be relied upon as all reasonable steps had not been taken to mitigate its impact.
- In the case of Kawasaki Steel v Sardoil [1977] the court found that if the cargo which is supposed to be delivered is delayed or destroyed, the chartering party has the ability to (and therefore must) obtain a replacement or alternative cargo.
- In the case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] the court held that a party must take into account not just its own interests but also those of the other party to a contract when taking its reasonable steps to mitigate.
Businesses should also note that even if a contract does not set out that steps to mitigate must be taken, the courts will actually imply this obligation into the contract anyway. However, the duty to mitigate is a two - way obligation – the unaffected party cannot simply sit on its hands and must consider offers from the affected party to mitigate the impact of force majeure.
When considering “reasonable steps” it is also worth taking into account how the courts view reasonable endeavours obligations and also the common law doctrine of mitigation of damages. For instance:
- A best endeavours obligation may:
- require expenditure on behalf of the obligor. For example, it obliged a Blackpool Airport to open outside of its normal operating hours despite the fact it incurred a loss in doing so as the ability to schedule flights during these times was essential to Jet2.com's business model (Jet2.com v Blackpool Airport Ltd [2012])
- impose an obligation to litigate or appeal against a decision, though this would not extend to something that was bound to fail or would be unreasonable in all the circumstances (Malik Co v Central European Trading Agency Ltd [1974])
- Reasonable endeavours are not as onerous:
- a party should weigh up "the weight of their contractual obligation" to the other party against "all relevant commercial considerations" such as its relations with third parties, its reputation, and the cost of that approach (UBH (Mechanical Services) Ltd v Standard Life Assurance Company [1986]);
- "what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try" to achieve the objective (Minerva (Wandsworth) Ltd v Greenland Ram (London) Ltd [2017]).
- the obligor is not normally required to sacrifice its own commercial interests and may be entitled to consider the impact on their own profitability (P&O Property Holdings Ltd v Norwich Union Life Insurance Society [1993]; Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd [2019]. This is one of the major differences between a reasonable and best endeavours obligation.
- The common law doctrine of mitigation of damages also gives some helpful guidance:
- In the case of British Westinghouse Co v Underground Electric Ry Co [1912] the court found that a mitigating party should not have to take any step, which a reasonable and prudent person would not ordinarily take in the course of their business; and
- In the case of James Finlay & Co Ltd v NV Kwik Hoo Tong [1929] the court found that a mitigating party was not required to put its commercial reputation at risk.
And if a party does not take steps to mitigate, what next?
As we mentioned in our previous article, it could well be the case that declaring force majeure could actually give rise to a breach of contract claim if a party does not follow the contractual process (if any) for making a declaration and this could well also be the case if a party does not take reasonable steps to mitigate. It is for the party claiming relief under force majeure to show that it has taken mitigating steps, and therefore being able to demonstrate this is absolutely critical. Businesses must therefore think about how they will do this, and retaining evidence to show this will be essential. For example:
- Do not sit back – get on with the mitigation! Think about the impact on both parties and how best to address this, and ideally, as we have said before, discuss the issue with the other party – it’s good to talk!;
- Keep records to show what you have done and how you arrived at your decisions – everything can look different in hindsight, so contemporary records and board minutes etc. will be very helpful for setting the scene should this come under scrutiny at a later date. Bear in mind that you might be forced to disclose these in the event that that you end up in litigation, and that unless they have been produced for the purpose of litigation, they may not attract legal privilege;
- Keep everything under constant review – the initial steps taken to mitigate will no doubt evolve as circumstances change.
Finally, the recent case of 2 Entertain Video Ltd & Ors v Sony DADC Europe Ltd [2020] is worth considering when deciding whether or not to declare a force majeure event has occurred:
- Sony and 2 Entertain had a contract under which Sony provided storage and distribution at a warehouse. Unfortunately, the warehouse suffered a major fire a as result of an arson attack during the 2011 London riots and all of its contents were destroyed.
- 2 Entertain brought a claim for breach of contract on the basis that Sony should have prevented the fire – in contrast. Sony argued that the fire was covered by the force majeure clause in the contract and therefore claimed relief to try to defeat 2 Entertain’s claim;
- The court found that, despite the riots and fire being stated in the clause as potential force majeure events, Sony had not put in place sufficient security at the site or stored the contents in a secure location as it was obliged to under the contract, and therefore Sony’s failure to do so was the main cause of the contents being lost, and not the fire itself..
In summary
COVID-19 may well be unforeseeable and fall outside a party's reasonable control, but to claim relief businesses must still take reasonable steps to mitigate and to comply with their contractual obligations.
If you would like to discuss this article or your own circumstances, please contact a member of our team.
