COVID-19 - Force Majeure Clauses VS. Contractual Obligations
March, 2020 - Leif Farquharson, Kendira Turnquest
The impact of Covid-19 is becoming more prevalent throughout the economic landscape of The Bahamas. Most recently, in an effort to contain the spread of the virus, preventative measures involving the closure of non-essential local businesses for a specified duration were introduced by the Government in exercise of its emergency powers. This has had far-reaching effects in the employment sphere. It has also impacted the ability of parties to complete commercial transactions or called for a revisiting of certain contractual arrangements. This brings into sharp focus an important question: Does a force majeure clause in a contract relieve a party from the duty to perform its contractual obligations?
What is a force majeure clause?
In Bahamian law, force majeure is largely a creation of contract. Force majeure clauses refer to events that are beyond one’s control, which make it materially impossible for the parties to carry out their contractual obligations. The presence of a force majeure clause in a contract usually mandates that no party to the agreement will be liable to perform its obligations if such performance is prevented by an unexpected circumstance outside that party’s control. In essence, it excuses the parties from performing the contract or, conversely, from incurring any liability due to the inability to perform their duties. Force majeure events are unforeseen incidents and may include a hurricane, flood, earthquake, explosion, war, warlike activities, insurrection, riots, civil commotion, national emergency, Acts of God, strikes, lockouts, freight embargoes, changes in law or statutes, and acts of government or governmental authorities.
The contract will often expressly list the events that will be subject to a force majeure. Alternatively, the contract may generally provide that “events which are beyond the party’s control” (or a similar expression) will result in a force majeure. Such a general clause will lead the courts to consider whether a specific event falls within the ambit of the force majeure clause. Practically speaking, the party seeking to invoke a force majeure clause will have the burden to establish that it is applicable in a given situation. The precise wording of the clause is critical in determining its effect, and will usually be construed with due regard to the nature and terms of the contract as a whole. It is also incumbent on the party invoking the clause to show that performance has become physically or legally impossible, and not merely more difficult or unprofitable. This can be a highly fact-sensitive exercise. Compliance with any requirements relating to service of notice may also be critical to a party’s ability to invoke the clause.
Is Covid-19 a force majeure event?
The question as to whether Covid19 (or indeed any other pandemic) constitutes a force majeure event does not appear to have been judicially considered in The Bahamas. The outcome will invariably turn heavily on the language of the individual contract concerned. The impact of the crisis upon the parties’ ability to perform their contractual obligations will also have to be assessed carefully from a factual standpoint. Whilst it is unlikely that many contracts will specifically list a pandemic as a force majeure event, the Government’s response in temporarily suspending many business operations and imposing a curfew may potentially trigger force majeure clauses for contracts governed by Bahamian law.
This is especially so for contracts that explicitly make reference to a “national emergency” or “acts of government” as a force majeure event.
In conclusion, a force majeure clause may be triggered by the current Covid-19 pandemic and/or the preventative measures introduced by the Government to contain the spread of the virus. The result will ultimately depend upon the construction to be accorded to the contractual clause in question and the specific facts of the case, and whether performance was genuinely rendered impossible.
The Doctrine of Frustration
Even where a force majeure clause is not included in a contract, it may nonetheless be discharged by operation of the doctrine of frustration. Essentially, this may operate to excuse further performance of contractual obligations where the parties have contracted on the footing that some fundamental thing or state of affairs, or even in certain circumstances a person, will continue to exist and, before any breach takes place, an event in relation to the matter stipulated occurs which renders performance impossible or only possible in a very different way from that originally envisioned. The effect of frustration is to bring the contract completely to an end forthwith, discharging the parties from liability for further performance. Due to its potential ramifications, the doctrine is not lightly invoked by the courts and is kept within fairly narrow limits.
Some of the more common frustrating events have been suggested to include: physical destruction of the subject-matter of the contract; cancellation of an expected event, where this is the basis of the contract; delay, which is not the fault of either party; and acts of state or changes in the law which render it legally impossible to perform contractual obligations. Once again, the Covid-19 pandemic and associated preventative measures will invariably raise questions as to whether certain contracts have been frustrated.
For further information, please contact:
Leif G. Farquharson – Partner – [email protected]
Kendira R. Turnquest – Associate – [email protected]
Please note that this publication is only a guidance note and as such is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your particular circumstances should always be sought, and our legal team is available to assist you with any questions or issues that you may have.
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