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Many companies in the energy industry will be very concerned about whether, given the disruption arising from the COVID-19 pandemic, they will be able to perform their contractual obligations. 

Under English law and Scots law with limited exceptions unless the contract provides otherwise or unless the contracting parties come to an agreement to the contrary, parties must perform their obligations regardless of any external circumstances with which they may be confronted.

If you are faced with situations where you are prevented from performing under a contract one of the things you should consider is whether your contract contains a “FORCE MAJEURE” or “FM” clause.

If your contract has an FM clause your starting point should be to read it carefully as these can differ considerably from contract to contract. In particular:

  • most FM clauses will provide relief to the extent that you are delayed or temporarily prevented from performing your obligations due to events outwith your control and which have not arisen due to your fault or negligence. These would require that there is no way in which you can perform;
  • some FM clauses will go further and will give relief where your performance is hindered by an FM event (ie. It is still possible but much more difficult to perform);
  • FM clauses generally do not give relief from the obligation to pay money and where they do this is usually only in circumstances where the physical method by which payment is to be made is unavailable – eg. the online banking system goes down;
  • some clauses are drafted widely so that anything outwith your control which prevents performance can give rise to relief. This would be likely to include delays caused by the effects of COVID-19 to the extent they cannot be avoided but would not include the economic effects of the epidemic nor the economic effects of the recent dramatic fall in the oil price. However, on occasion, clauses are included in contracts which provide for a right to renegotiate the contract if a party faces substantial hardship. Even if there is a clause like this is in your contract you need to consider how the contract defines hardship;
  • some clauses are drafted tightly with only specified events being capable of giving rise to relief. For example the FM provisions in the LOGIC suite of contracts list specific circumstances which can be FM occurrences under the contract, including “strikes”, “radioactivity”, “maritime…disasters”, “riot, war” and an “earthquake” and the introduction or change of laws, statutes, decrees and ordinances by local or duly constituted authorities. LOGIC contracts do not list pandemic/epidemic or illness as FM events;
  • any party seeking to rely successfully on an FM provision must usually demonstrate that there are no alternative means for performance under the contract and that but for the FM event they would perform. Seadrill Ghana Operations v Tullow Ghana Ltd has illustrated that an FM event must be the sole cause of any failure to perform contractual obligations, not simply one of a number of causes of the failure;
  • many FM clauses will require that you try to remedy the situation and to mitigate the effects of the FM event;
  • most clauses will tell you what to do if you want to claim FM and many require full detail of the particular circumstances to be given promptly. It is crucial that you follow these notice requirements and don’t delay so that you do not lose the right to claim FM relief;
  • there may be specific contact requirements during the period of FM – such as meetings between parties to try to mitigate the effects of the situation. Again it is important that you follow the process;
  • some FM clauses may give one or more of the parties the right to terminate the contract if the FM situation goes on for longer than a period set out in the contract.

The effect of an FM clause is to suspend the performance of the particular obligation until the FM situation has been resolved. The obligation to perform does not go away and, absent termination, you will be expected to perform it once the FM situation has been resolved.

Some contracts will say what the effects of the FM event will be. For example the LOGIC marine construction contract provides that in an FM scenario any schedule of key dates by which work is to be performed can be amended to take account of the FM downtime but the contract price will not be changed as a result of the delay.

Your FM clause may be wide a general one which is wide enough to catch disruption caused by Covid-19. Even if your contract has a specific list of FM events which does not list epidemic or pandemic all is not lost. There may be other events listed which will be relevant in the context of COVID-19. For example many FM clauses give relief where performance is prevented as a result of the actions of a government or local authority. If a government or local authority prohibits attendance of staff on site or requires the shutting down of a business’ operations as a result of measures to tackle COVID-19 and the work cannot be performed in some other way then a claim for FM relief may be possible nonetheless.

If your contract does not have an FM provision the common law doctrine of frustration may apply. Frustration only applies in certain restricted circumstances where performance has become impossible or where the obligations of the parties has become radically different. If a contract has become frustrated it is automatically discharged and the parties are excused from their future obligations. If there is no force majeure clause covering the situation and performance is impossible or illegal as a result of the effects of COVID-19 (not merely that it has become more difficult or more expensive to perform) then the contract may have been frustrated. 

If you need help reviewing your contractual options please get in touch with your usual contact at Stronachs LLP. We are ready to help. 

Stronachs LLP

25 March 2020

 

 

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