On 11 March 2020, the outbreak of the novel coronavirus, COVID-19 has been declared by the Director-General of the World Health Organisation to be a pandemic in view of its global spread and severity. There is no doubt that this ongoing pandemic is posing significant issues and challenges for businesses. As the restrictions on movement and international travel in Malta tighten, it may be the case that certain businesses may start struggling to perform obligations under certain contracts and may consider invoking a 'force majeure' event.
This decision to claim 'force majeure' may be motivated by several reasons, depending on the specific contractual terms, which would have been agreed by the parties at inception of their agreement. The most common reasons, however, why a non-performing party may decide to claim 'force majeure' include the following: (i) to render their non-performance as excusable, (ii) to possibly avoid incurring liability in damages for non-performance, (iii) to avoid the risk of termination for default and/or (iv) to permit delays in performance without incurring damages for the delay.
The Maltese Civil Code (Chapter 16 of the Laws of Malta, which is the main legal instrument which deals with contracts in general) provides for a 'force majeure' statutory defense to non-performance. It states that "the debtor shall not be liable for damages if he was prevented from giving or doing the thing he undertook to give or to do, or if he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event" (art. 1134). It fails however to provide for statutory definitions and/or guidance on what constitutes an irresistible force or a fortuitous event.
This means that one would need to consider how the term (whether it is 'fortuitous event', 'force majeure', 'irresistible force' or 'act of God', which are very often used interchangeably) is defined in the contract in question and, to a certain extent, how it is interpreted by our Maltese courts. In the absence of which, the fall back would always be the common intention of the parties. Tracing the intention of the parties will naturally be a challenging exercise especially at a time when one party is attempting to use this 'force majeure' claim to render itself not liable or to excuse itself for non-performance. This is the main reason why contract drafters should always give a contract a clear written meaning.
The use and strength of the 'force majeure' defence, whether it is regarded to be available to the non-performing party due to the above-mentioned statutory provision or because it was contractually agreed between the parties, will depend on when the relevant contract was entered into and when the non-performance of the contractual obligation arose, whether it was pre or post COVID-19 outbreak.
Companies which entered into contracts pre-COVID-19 outbreak and which are considering whether they should invoke 'force majeure', they should bear in mind that there are several factors which need to be considered:
a. Does the contract define what constitutes a 'force
b. Is the definition of 'force majeure' a general definition which may capture COVID-19?
c. Does the definition refer to epidemics or pandemics?
d. Are events that could have reasonably been provided against, avoided or overcome excluded from 'force majeure'?
e. Was the non-performance triggered because the party did not have adequate business continuity measures and processes, implying some form of negligence on the part of the non-performer?
f. How close is the nexus between 'force majeure' and the non-performance?
Besides considering the exact wording of the 'force majeure' clause, one would need to carry out a factual assessment of the particular circumstances which led to the non-performance. Hence, bottom line, it is evident from the above that one cannot just claim that the COVID-19 outbreak is a 'force majeure' without carrying out a proper assessment of why this is being invoked in the first place.
Companies currently entering into new contracts should be hesitant to rely on broadly drafted 'force majeure' clauses. They may consider including pandemic events and/or COVID-19 by name, as events which are construed, amongst others, as being 'force majeure' events. If a party fails to include COVID-19 as a 'force majeure' event in a contract concluded during or after the outbreak, it may be held to have assumed the risk of the effect of the outbreak on its own contractual performance. This is being said because knowing about COVID-19 may exclude it from being a 'force majeure'. The inclusion of the term is therefore key.
In light of the above, it is evident that whether one can invoke a 'force majeure' clause as a defence to non-performance or whether one should draft adequate 'force majeure' clauses into contracts, especially ones being entered into in the coming days and weeks or even months, requires careful analysis and formulation.
Companies who have entered into new contracts over the past few weeks and months should also assess whether it is permissible to invoke COVID-19 as a 'force majeure' event, in particular, if the likelihood of COVID-19 being an obstacle to the performance of a contractual obligation could have been foreseen at the time of conclusion of the contract.
Specific industry sectors, such as transport and tourism sectors, may also have to see whether the introduction of mandatory measures and other changes in law relating to COVID-19 constitute a real and unavoidable obstacle to the performance of contractual obligations. For such mandatory measures or changes in law to qualify as a 'force majeure' one would have to see the terms of the contract, as noted above, or in case of no such clause, one would have to see whether such would qualify as an 'irresistible force' in terms of the law.
We therefore recommend that you seek legal advice on this subject, particularly before invoking COVID-19 as a 'force majeure' or before amending or entering into a contract to address the issue during these volatile times.
We are analysing this topic from many different angles at the moment and will publish further information notes as things develop.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.