Force majeure or frustration may spare deals wrecked by coronavirus

Where the Covid-19 outbreak has caused difficulties in performing contracts inked before the pandemic, the existence of force majeure (FM) clauses in contracts could help parties exit their obligations or at least reach a compromise, say lawyers.

FM refers to a specific contractual clause which frees both parties from liability when unexpected circumstances, such as natural disasters or terrorist attacks, prevent a party from meeting its contractual obligations.

"A well-drafted FM clause, which makes express provision for 'pandemics' or 'epidemics', could go some way in giving contracting parties clarity on their contractual rights and obligations in the current climate," said legal counsel Yvette Anthony of OC Queen Street LLC.

"Conversely, if the FM clause is vaguely drafted or is a mere afterthought or boilerplate clause, challenges abound. Parties may find themselves mired in arguments over whether they can avail themselves of the FM provision in the current situation."

For contracts that do not have an FM clause, there is also the legal doctrine of frustration, which operates by way of law and does not depend on the existence of a contractual provision excusing a party.

"In practice, frustration can be more challenging to invoke as a party would have to demonstrate the existence of an unforeseen event which renders performance impossible - mere hardship being insufficient to constitute a frustrating event. Therefore, a party seeking to excuse performance of its obligations would generally tend to argue the existence of an FM event, if an FM clause exists," said Ms Anthony.

FM clauses can exist in all sorts of contracts regardless of value, and are subject to negotiation between the parties as to their scope and existence.

Law partner Navin Joseph Lobo of Premier Law LLC notes that more clients are seeking advice relating to the operation of FM clauses.

"The issues that we advise on can be largely distilled to those arising when a party's performance of its contractual obligations is prevented or impeded by the pandemic or its resultant consequences," he said.

There are cases where a "scan of the horizon" may foretell a party's inability to meet its obligations when they become due in the future.

Mr Lobo added that the performance disruptions typically affect contracts and industries hard hit by the pandemic.

"Restrictions relating to, for example, closures of or occupancy levels of business premises, workplace and public safe distancing measures, and disruptions to supply chains can affect performance of an agreed contractual obligation and the commercial viability of the underlying contract.

"We are seeing this translate into disputes, particularly in relation to supply contracts, construction contracts as well as commercial contracts in the transport and advertising sectors."

 
 

Mr Lobo added that many clients whose business operations and contractual obligations are affected by consequences of the pandemic are now taking a closer look at the specific wording of their FM clauses, pointing out that specifically listing an "epidemic or pandemic" as a deemed FM event would make it that much easier to seek relief based on the FM clause, provided of course that all the other requirements of the FM clause are also fulfilled. Key among these is an examination of whether the pandemic has caused the partial or total inability to perform the specific contractual obligation in question.

"The scope and relief available in respect of FM events are set by the parties, and so the practice of replicating standard boilerplate clauses without appropriate adaption for the specific context should be discouraged.

"Also, most businesses should now be aware that the Singapore Government has also enacted legislation in response to Covid-19, namely the Covid-19 (Temporary Measures) Act, which provides various temporary relief from the inability to perform contractual obligations under certain contracts if that inability is materially caused by a Covid-19 event," said Mr Lobo.

A version of this article appeared in the print edition of The Straits Times on August 17, 2020, with the headline 'Force majeure or frustration may spare deals wrecked by coronavirus'. Print Edition | Subscribe