01 Apr 2020

COVID-19: Force majeure in the rail industry

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As the impact of COVID-19 builds every day, supply chains are being significantly disrupted and businesses' rights and obligations under contracts are coming into sharp focus: none more so than in the rail industry.

A particularly frequent question is whether a force majeure clause excuses parties from performing their obligations in these circumstances?  By way of a reminder, a force majeure clause is designed to allocate between parties to a contract the risk of exceptional external circumstances occurring. It is intended to ensure that a party to a contract is relieved from being required to perform when it is not possible to do so as a result of those exceptional external circumstances. One of the reasons for including a force majeure clause in a contract is to avoid that contract being automatically brought to an end as a result of it becoming impossible to perform - sometimes known as that contract being “frustrated”.

Force majeure could apply to many different types of rail contracts from rolling stock contracts (both maintenance and manufacture) through to contracts for the provision of catering services. 

We consider below how force majeure provisions may work in these circumstances and some particular considerations and questions to ask. 

Force majeure

If a contract includes force majeure provisions, these can be invoked by the parties if they’re unable to perform their contractual obligations due to a significant and unforeseeable event outside of the control of the parties, such as a natural disaster or terror attack.

A number of companies have claimed that the coronavirus – and the ensuing clampdown on the movement of people and goods – amounts to a force majeure event. 

In the rail industry it is standard practice to include force majeure provisions in most types of contract. However, the definition of a force majeure event and the effect it must have on the performance of obligations varies in different types of contracts.

Parties wishing to rely on force majeure must consider the following points:

Is it a force majeure event? – COVID-19 has been declared a pandemic by the World Health Organisation and is considered an epidemic within the United Kingdom. Is an epidemic specifically covered as a force majeure event in the contract? Even if it is expressly included, it may still need to satisfy other requirements to constitute force majeure. If “epidemic” is not expressly included in the contract,  this does not necessarily preclude a claim of force majeure. It may be that it falls within another category such as "act of God", or some other catch-all provision. This will require careful consideration on a case–by-case basis.

Foreseeability tests – some contracts exclude events which could reasonably have been provided against, avoided or overcome. The party wishing to rely on force majeure provisions will, in these circumstances, have to show that: (i) it acted reasonably; and (ii) any impact of force majeure could not have been avoided or prevented by them. 

Causation – it is common for force majeure clauses to specify the impact that the event or circumstances in question must have in order for the clause to be triggered. It will be important to show that the occurrence of the exceptional external circumstance has caused the inability to perform the particular obligation. This causal link is key. Reference may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party will be relieved from obligations to perform. This is mostly a factual question but, again, will also turn on the exact wording in the contract. The protection offered will only apply to the limited extent that the party cannot perform.

"Prevented" means that it must be physically or legally impossible to perform the obligations in question. This is a high bar. It is not enough that performance is more difficult, more expensive, or less profitable. Even where the word "prevented" has not specifically been used, the courts have, in the past, interpreted force majeure clauses as only applying where performance is impossible. This has been in circumstances where the relevant clauses state that on the occurrence of causes “beyond their control” a party will be relieved of its obligations. Similarly, it is common to see wording such as "unable to perform" and this is likely to be treated in a similar way by the courts.

"Hindered" – or "impeded", "impaired" or "interfered with" is a lower standard and may, in appropriate circumstances, be triggered by performance being made substantially more difficult.

For example, a shortage of raw materials caused by a force majeure event may hinder the performance of a manufacturing contract if those materials can be obtained at a higher cost elsewhere. It would not prevent the contract from being performed, unless going elsewhere breached other contracts. However, the fact that performing would simply be less profitable due to higher costs, for example in sourcing alternative supplies of materials or labour, is generally unlikely to be sufficient to absolve the party in question of liability to perform.

Proving that performance has been "delayed" should be less onerous than proving it is legally or physically impossible: it is not necessary to show that obligations have been "impossible" to perform or "prevented" for a period of time, just that complying as quickly as required under the contract is substantially more difficult.

Mitigation duties – the party claiming force majeure relief is usually under a duty to show it has taken reasonable steps to mitigate/avoid the effects of the force majeure event. In franchise agreements the requirement is that a franchisee uses and continues to use all reasonable endeavours to mitigate/avoid the effects of the force majeure event. As a minimum, a party seeking to rely on a force majeure clause must also show that there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences. This could, in the case of an “all reasonable endeavours” obligation, include steps with a significant cost attached to it.

As a result, where a party anticipates falling into difficulty with meeting its obligations, it is crucial to explore alternatives. For example, this could be due to staff shortages through self-isolation in accordance with government guidelines or issues with the supply of materials. Exploring alternatives could include whether alternative sources of labour or materials are reasonably available – including at higher cost, unless this involves breaching existing contracts. Of course, in the rail industry there are significant safety and trade union issues that will also apply to available alternatives.

A key consideration may be that a force majeure event in one contract may well not be a force majeure event in another contract. This could – leave a party stuck in the middle: required to mitigate in one contract, but without the necessary tools to so do in another related contract.

Notice requirements – parties must consider whether prompt notification is a contractual condition precedent to relief or not. If notice isn’t served correctly, the party seeking to rely on force majeure cannot claim relief – and in these circumstances a generic notice won’t help. If both parties to a contract want to rely on force majeure, both parties must serve a valid notice that complies with the requirements in the contract. 

Consequences – in most contracts, establishing force majeure will lead to relief from performance, avoiding the risk of a default termination. For those contracts with specific target dates - such as committed obligations and rolling stock manufacture milestones - an extension of time to those target dates is typically also available. If a party serves a notice of a force majeure, only those obligations that cannot be performed as a consequence of the force majeure event are suspended and not the whole contract. This means a party will be required to keep performing other obligations not affected by the force majeure event. Remember – a force majeure notice only works to suspend the performance of the notifying party. If other parties also wish to have their obligations suspended, separate notices will be required.

Commonly, parties bear their own costs arising from any force majeure delay but there are exceptions where compensation may be payable after a certain duration and/or for certain costs from one party to another. In the rail industry these tend to be limited and so an on-going force majeure event can lead to significant financial impact for all of the parties involved.

Extended periods of force majeure can lead to a right for one or more parties to terminate the contract. If the parties do not wish this to happen it is important to engage in discussions sooner rather than close to the deadline. It may be preferable for these to be held on a “without prejudice” basis. 

Practical steps - Parties seeking to rely on a force majeure clause should follow the following practical steps:

  • Consider in detail the precise wording of the force majeure clause, the contract as a whole and the circumstances that have arisen. Determining whether performance is excused by a force majeure clause (and to what extent) can be a difficult and is a highly fact-sensitive exercise.

  • Explore alternative means of performing, reducing delay, or minimising any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at higher cost.

  • Serve any notices as required under the contract, as soon as possible and in accordance with the notice provisions. Consider carefully what event or circumstance you allege constitutes the force majeure event, taking into account the wording of the clause and the timescales required for service of notice: the outbreak of COVID-19 itself, or subsequent government restrictions put in place.

  • Do not attempt to rely on increased costs to excuse non‑performance or delay, as this will not usually be sufficient.

  • Keep a documentary record, particularly of: why performance was impossible, hindered or delayed as the case may be; the steps taken to find alternatives and mitigate loss; and the service of any notices.
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Darren Fodey

Darren Fodey
Partner

T:  +44 20 7809 2388 M:  +44 7920 201 290 Email Darren | Vcard Office:  London

Tammy Samuel

Tammy Samuel
Partner

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Suzanne Tarplee

Suzanne Tarplee
Partner

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