The retail & consumer sector is feeling the impact as COVID-19 begins to cause huge global disruption to supply chains and has forced businesses to close or to move online. Even online operations are being impacted by manufacturing and warehousing closures caused by COVID-19.
The retail & consumer sector is heavily reliant on global supply chains for raw materials, ingredients and products as well as the ability to sell to customers via stores, restaurants and, increasingly, via e-commerce and delivery options. As the ability for businesses to make their products and services available to customers is limited by government restrictions on a global scale, businesses are bracing to weather the storm and some are finding new ways to reach their customers. For example, many restaurants are rushing to offer delivery to their customers, with some operating as quasi-supermarkets. Many service providers in the sector such as gyms and fitness providers are moving their services online to keep customers engaged.
Despite these examples of retail & consumer businesses finding innovative ways to continue to serve their customers, some businesses are unable to do so and global supply chains are continuing to suffer. Whilst we note that Chinese factories are now at various stages of restarting and ramping back up capacity, production across the rest of the globe is currently being hindered and disrupted. Examples of the practical impacts COVID-19 is having in the retail & consumer sector supply chain are:
The above all means that customers and suppliers (and indeed all parties in the supply chain) are keen to understand their liabilities under their contracts should COVID-19 cause delay, but more importantly all parties should be looking to work collaboratively to find solutions. Of particular interest from a legal perspective – but subject always to the wider commercial relationship - is whether liquidated damages remain payable by the supplier, and whether the supplier has any other options such as suspension, termination or entitlement to increased costs under the contract’s change in law clause triggered by government ordered restrictions.
This note looks at how English contract law on force majeure and frustration applies to the COVID-19 pandemic, and highlights other contractual hints and tips that all parties in the supply chain should be aware of.
In assessing whether or not a party is entitled to relief from its obligations, it is important to check both:
For example, the contract may be governed by English law meaning the language of the contract will be interpreted under English interpretation principles. However, the obligations under the contract may be being physically performed in Italy (for example at a factory or via a freight provider) meaning the Italian law governing whether or not production must be suspended will be relevant to test the impact of the force majeure event (see steps 4 & 5 below).
Force majeure is a contractual mechanism that is only available if expressly set out in the contract. Unlike civil law jurisdictions, English law has no statutory provisions governing force majeure, nor will force majeure be implied into contracts under English law.
The language of a force majeure provision will be interpreted in line with existing interpretation principles under English law and there is precedent regarding the meaning of particular phrases. The English Courts will focus closely on the contractual language used such that each case will turn on its own facts and the contractual interpretation of the relevant term.
In the absence of any contractual force majeure clause (or other assistance that is provided by the contractual terms), a party would have to rely on frustration to avoid its contractual obligations (see step 9 below).
Force majeure clauses tend to follow two different formats:
If the contract follows option 1 - some exhaustive force majeure clauses will contain specific wording relating to disease or epidemic or pandemic. However, if pandemic is not expressly listed, other events that may be applicable to COVID-19 include:
If the contract follows option 2 then, on the face if it COVID-19 is an event beyond the affected party's reasonable control. In either instance note:
The affected party may feel there are benefits, from a relationship perspective, of flagging up the force majeure event and the delay it has caused. It may wish to serve a general alert or early warning notice to its customers that COVID-19 is causing it delay/disruption and that it is doing whatever it can to mitigate this. Parties affected by COVID-19 sending these notices should be wary that:
The contract is likely to require that the affected party serves notice of the force majeure event within a specified period. This may be drafted as a contractual obligation to serve notice, or as a condition to claiming relief. Look out for words/phrases such as "provided that" or "conditional upon" – these may indicate that if the affected party fails to serve notice within the required time period it loses its right to claim relief. The affected party must follow the requirements of the notice provision meticulously including who the notice should be addressed to, how it should be sent and information it needs to contain.
Once a force majeure event has been established, the steps an affected party has to follow to claim relief will depend on what the contract says. Generally we find the affected party has to show:
Prevent - Preventing performance means that it must have become physically or legally impossible, not merely difficult. For example, a supplier would have to show that the government in the applicable jurisdiction has mandated its factory ceases operation (through legislation or binding guidance). So far, governments are not generally mandating that manufacturing should stop. The affected party must also show that it was "ready, willing and able" to perform its obligations under the contract and it was the FM event which impacted performance.
Delay - Delay has a wider scope and may be easier for an affected party to establish. The supplier will still need to establish that as a result of the force majeure event, performance of its obligations is taking longer (or finishing later) than planned. The clause may require the delay to be the direct result and the affected party will still need to comply with the remaining steps below in order to claim relief.
Hinder – similarly to delay, this has a wider scope and may be easier for an affected party to establish. Hindrance may not be merely financial, case law makes clear "the fact a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure", unless the contract specifically addresses this. The clause may require the hindrance to be the direct result and the affected party will still need to comply with the remaining steps below in order to claim relief.
The affected party must show it has taken "all reasonable steps" to avoid the operation of the force majeure clause or to mitigate its consequences. This is an implied duty which applies, in all apart from exceptional situations, even if the contract contains no express clause requiring the affected party to mitigate the impact of the force majeure event.
It will be a question of fact as to whether an affected party has taken steps to mitigate the impact, but relevant factors could be:
The fact that the above measures may be more expensive does not matter. "A mere difficulty or additional expense is not a sufficient ground" for the force majeure provisions to be invoked , and the English courts are particularly alive to attempts to use force majeure provisions to avoid performance for economic reasons. Therefore, just because a contract has become more expensive as a result of COVID-19, or even uneconomic, to perform, that will not always constitute a force majeure event.
An entitlement to force majeure relief generally means (1) that the affected party is excused from contractual liability, including damages, in relation to its non-performance (or delay); and (2) either party may terminate the contract where the force majeure event continues for a defined period (usually 3 months plus). Relief could include:
a. relief from liability for liquidated damages with an extension of time to delivery dates;
b. relief from breach of contract claims for non-performance; and
c. relief from termination for default.
This will depend on the contract. The non-affected party may have a contractual obligation to help the affected party to mitigate the impact of the force majeure event.
We suggest taking a holistic view of the entire contract. The following clauses may be particularly relevant:
English law recognises the common law doctrine of frustration. However, if a contract includes a force majeure clause, the common law rules on frustration are ordinarily displaced in relation to that same event so that frustration cannot be relied on as an alternative.
This means that if a party has a legitimate claim for force majeure, but fails for example to invoke a contractual procedure under the relevant clause, it is very likely that it could not argue frustration in relation to the same event, because the frustration remedy has been inadvertently lost by not complying with the specific provisions of the contract.
If there is no force majeure clause, frustration may enable a party to avoid its contractual duties. However it will need to show:
Last reviewed: 30 March 2020
 Thames Valley v Total Gas, High Court, 2005
 Channel Island Ferries v Sealink 1988 1 Lloyds Rep 323
 B&S Contracts v Victor Green 1984 ICR 419, (427(D))
 Jackson v United Maritime Insurance  LR10 CP 125