If you need emergency help with– Public procurement
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Summary
COVID-19 has impacted many public contracts, meaning that suppliers and / or public bodies cannot fulfil their obligations. For the public sector, the Cabinet Office is currently advising that buyers and supplier talk to each other to support supplier cash flow. #
9. Contracting authorities should aim to work with suppliers and, if appropriate, provide relief against their current contractual terms (for example relief on KPIs and service credits) to maintain business and service continuity rather than accept claims for other forms of contractual relief, such as force majeure.
Procurement Policy Note – Supplier relief due to COVID-19
However, you may find as either a buyer or supplier that the other party does want to use force majeure and/or frustration to change or terminate your agreement. Our advice is to follow the Cabinet Office guidelines and negotiate an alternative solution.
If you are forced to consider force Majeure these guidelines explain what it means and whether it applies. We are also creating specific advice for key CCS frameworks.
Background
From a public contract point of view, COVID-19 has meant that it’s difficult or impossible for many suppliers to fulfil their obligations. Similarly, many public sector bodies cannot fulfil their contractual obligations.
If these were normal circumstances contract mangers may be considering penalties or even termination due to breach of contract. It’s likely that service-based contracts have escalating penalties such as service level agreements (SLAs). These SLAs may be triggered if they are failed by a certain amount or failed on multiple occasions, in which case they may become critical and grounds for termination. Similarly, milestones and other obligations are likely to be broken.
These are not normal circumstances, and the main thing at the moment on the minds of most people in the public sector is just keeping things going. To this end, there are two useful tools in the contract toolbox: force majeure and frustration.
What is force majeure?
Force majeure is a clause in some, but not all, contracts which states what happens if one or both parties cannot hold up their end of the deal because of extraordinary circumstances. However, there is no general rule about force majeure. It doesn’t have a generic definition in common law, which means that each contract must be taken on a case by case basis.
Force majeure is Latin for ‘superior force’. In general terms, it refers to events that impact a contract but are outside the control of the parties to the contract. However, the use of Latin may be deceptive as it seems like it references some arcane bit of statute that trumps contractual clauses.
Recent cases have clarified the barrier for a force majeure clause to be triggered.
“physically or legally impossible, not merely more difficult or unprofitable”
Thames Valley Power v. Total Gas & Power, [2005] EWHC 2208 (Comm)
Does force majeure apply to my contract?
Force majeure is not a trump card. Various cases have clarified that force majeure clauses must be interpreted narrowly and exactly as written in a specific contract. If there are no force majeure clauses in a contract, then it probably does not apply.
If there are force majeure clauses, then they likely only apply if the particular circumstances they describe are covered.
If the force majeure clauses are vague, then you must look at the exact wording. While the text must be interpreted in the context of the contract as a whole, cases have established that you cannot assume a general intent to apply force majeure in a given circumstance if it is not set out in the contract.
See: Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star) [1996] 2 Lloyd’s Rep 383
Do I have a force majeure event?
There are a set of questions you should ask about your services, taking into account the current facts of the situation:
- Is there an actual or potential issue with the delivery of the services?
- Does the contract include force majeure clauses?
- Are circumstances and / or the delivery issues set out in the clauses, either by being directly referenced in the text or through reading in the context of the contract?
- Were reasonable steps taken to avoid the non-performance?
If you can answer YES to all of the above, then it is likely that your force majeure clauses will apply.
What do I do if believe I have a force majeure event?
Talk to your suppliers.
Each contract will have different force majeure clauses. If you’re using a government framework or standard terms, then they may be very similar, but you should still check as there are subtle differences. Also, the specifics of your service and your Call Off agreements will have an impact on what your rights are.
It is likely that the clauses will allow your supplier to fail to meet certain conditions of the contract without penalty. If you’re thinking of using the clauses, you should always consider consulting a specialist in public procurement law first.
Force majeure and COVID-19 Q&A
What if one party claims it cannot perform but the other does not agree?
If your supplier claims that they cannot provide their contracted services or are unwilling to do so due to force majeure but you disagree, this would be classed as a contract dispute.
Given the current circumstances, we would always suggest that you attempt to talk to your supplier and reach a reasonable compromise, potentially following up with formal changes.
However, if you cannot reach an agreement then you should follow the dispute resolution procedures in your contract, as even in current circumstances various remedies will apply, potentially up to and including damages for breach.
See Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102.
What if one or both parties cannot perform but there are no force majeure clauses?
If one or both parties cannot hold up their end of an agreement, then you can consider the common law doctrine of frustration which we will cover in another update.
What if one or both parties cannot provide the intended services but can provide others?
If your supplier cannot provide the services that they are contracted to but can provide other services, or can provide them in ways that aren’t anticipated in the contract, then it may be possible to renegotiate terms and formalise in a change request / variation.
However, in public contracts the scope for re-negotiation is narrower than in commercial contracts because they’re governed by the public contract regulations (chiefly Regulation 72). We will issue further guidance on this in due course.