Covid-19 and Force Majeure

covid-19 and Force Majeure

On the 11th of March 2020, the prevalent global COVID-19 outbreak was declared as a Pandemic by the World Health Organization and many countries moved to impose restrictions on movement of persons, business activities and day to day operations in an attempt to contain the spread of the virus.

The government of Sri Lanka imposed an island-wide curfew from 20.03.2020 resulting in lockdowns and restrictions on business activities except for those classified as ‘Essential Services’ by the government.

In these unprecedented circumstances, the question arises as to the accruing liability of contracting parties on account of un-performable contractual obligations arising from the lockdown/restrictions; would the current COVID-19 pandemic amount to a “Force Majeure” event?

Contractual Force Majeure contemplates a situation where a party to a contract is unable to perform contractual obligations or is excused from performance due to an unanticipated event (or events) outside a person’s control and/or which could not have been anticipated which renders performance of the contract impossible and/or illegal.

Force Majeure as per terms of Contract:

Many contracts contain a Force Majeure clause as a part of “standardized” terms and conditions. Whilst such clauses tend to cover a ‘similar’ set of events (e.g. War/ Riots/Earthquakes/ Epidemics /Industrial Action, Acts of God etc.) the application of such clauses can vary according the applicable facts/circumstances and the nature of the transaction.

Thus, Parties seeking to establish Force Majeure would require to objectively demonstrate that the circumstances in issue were ‘unforeseeable, unsurmountable and unavoidable’ in respect of the contractual obligation from which performance is sought to be excused.

A party seeking to establish a Force Majeure situation on account of the pandemic should consider examining the following aspects of the contract document:

  • Does the contract contain a “Force Majeure clause”?
  • If yes, does the clause make reference to Pandemics/Epidemics as a Force Majeure event? [Most Force Majeure clauses list out (a generally non exhaustive) set of events and circumstances which would amount to Force Majeure events.]
  • If no, is the list of events specified in the Force Majeure clause exhaustive or non- exhaustive?
  • If non- exhaustive, how does the contract define/describe a Force Majeure event?
  • Can the current pandemic situation be brought within the definition of Force Majeure as set out in the contract?

On the parties having ascertained whether the current situation falls within the purview of the Force Majeure clause the next step would be to consider the following:

  • The procedure(s) to be followed as per the contract?
    [Most contracts will specify notice requirements/ timelines / handover procedures etc.]
  • What are the consequences of a Force Majeure event as per the contract?
    [E.g. Termination/ extended deadlines/ Refunds/ compensation etc.]
  • Steps to be taken to manage the consequences arising from the Force Majeure event as per the contract?

Force Majeure under General Law:

On a contract being silent on Force Majeure or in the absence of a contract, parties may seek to establish Force Majeure under the general laws and principles regulating contracts in Sri Lanka (i.e. a combination of the English contract law and the principles of the Roman Dutch Law of Obligations).

Whilst statute law and precedent on this specific area of force majeure is sparse, parties in contractual transactions subject to statutory regulation may refer to the requisite statute /regulation for directions on a Force Majeure situation (if any).

Additional consideration may be given to the principle of Contractual Frustration; in terms of which a contract would be discharged where a supervening event occurs rendering the performance of the contract impossible OR where the obligations under the contract becomes radically different to that originally undertaken. A frustrating event can lead to the contract being terminated at the point of the event in respect of future contractual obligations.

The principle of Frustration is however traditionally sought to be applied by Courts more conservatively than not. Thus, seeking redress under this principle would necessitate establishing conclusively that a fundamentally different unexpected situation had emerged. There is precedent to suggest that Courts would not permit the invocation of frustration in cases of (sometimes extreme) hardship or to relieve a party from an imprudent commercial bargain or where the parties had failed to foresee a reasonably foreseeable event, thereby casting a heavy burden on an applicant.

Practical considerations:

Parties pleading Force Majeure may also be required to demonstrate the steps taken to mitigate losses accrued on account of the Force Majeure event, with the type of action dependant on the specific nature of the particular transaction.

It is best advised that all the requisite procedural steps required to be taken as per the contract terms in a Force Majeure situation as well as other steps that would be practically necessary to enable parties o establish all losses be adhered to, such as maintaining records and collecting evidence of delays/losses, negotiating and deciding on a way forward with the contract (if possible), looking into the possibility of obtaining governmental concessions granted for affected parties etc.

Considering that the coronavirus pandemic is unprecedented even in a global context, how judicial review of Force Majeure clauses will unfold is to be seen and will be a challenge for the Law. We hope for a positive development of the Law for the future before us with COVID- 19.