Frustration and force majeure – the impact of COVID-19

Alex Wrixon: Good morning, welcome everybody to this ThinkHouse Foundations webinar in electronic format. You cannot tell from our snazzy backgrounds but I have escaped to my parents' farm in Herefordshire - six weeks on I am still getting abuse for having soft city hands - and I am joined by suburbanite Tom Cox who is in his dining room in St Albans I believe. Morning Tom.

Tom Cox: Morning Alex, yes I am safely ensconced in my dining room in St Albans, and I wish I could say the same for my hands actually. The lockdown has meant I have spent more time in my garden by early May than I ever have done previously, so that and the constant 'anti-bac'ing has caused them to have a very rugged feel, which your father might approve of, I do not know - but good morning to you and good morning to everyone who has joined us. This is obviously not the way in which we typically have done our ThinkHouse Foundations events but thank you very much for joining us, we are delighted to be able to put something on for you and very much hope that normal service may be resumed in the future.

Alex: Indeed. In the meantime we are aiming to do this session in a Q&A format, technology allowing. In terms of questions I have some pre-prepared questions here which should get us through the main topics we want to cover, but there is a Q&A function which you can use in Zoom, so please do fire in your own questions and I will try to pick some of those up in real time if I can, or we will do a question session with Tom at the end of his talk. Time permitting, we will deal with as many of your questions as we can, of course.

You will also see there is a chat function which is closed now, but in an attempt to recreate something of the coffee and biscuit session that we would normally have at these events, we are going to open up the chat function at the end so that there is a chance for you to ask any further questions to either of us, or also to chat to one another and discuss this or anything else you feel like discussing amongst yourselves.

So before we kick off, just for anyone that is new to ThinkHouse Foundations, I will explain the concept. This is something we do once every six months. It is aimed at in-house counsel of zero to five years PQE and we run training sessions on anything of current interest. We usually have something on soft skills too, and we look to you for ideas of what we run these sessions on, so please do get in touch through either of the ways I mentioned before, or send us an email afterwards and let us know what you want us to cover. As Tom says, hopefully at some in the near future we will be back doing these in Birmingham and London every six months.

Right Tom, that's the admin, I think I have covered everything; does any of that come as a surprise?

Tom: None of that so far is a surprise Alex, I am pleased to say; and if we could keep surprises to a minimum for the next half an hour or so I would be greatly appreciative.

Alex: Well that is in the hands of the audience I think more than mine, but let us fire away. So let us start right at the beginning and the basics, a slow one for you to start. What are 'frustration' and 'force majeure' and why are they such hot potatoes at the moment?

Tom: Well the reason they are such hot potatoes at the moment is that they are what parties may currently be looking to rely on in the present circumstances to excuse non-performance of their contractual obligations where there has been some sort of supervening event - perhaps Brexit, perhaps COVID-19 - which they say is making their performance impossible; so for all parties to contracts in these circumstances these subjects are of relevance. It may be a party is seeking to say that a contract has been frustrated or that a force majeure event has occurred to excuse their non-performance. Or it may be there is a party on the other side who is wanting to insist on contractual obligations. Either way they are hot topics at the moment.

I will deal with each in turn, but start with frustration. So whereas force majeure is a contractual remedy, frustration is the overarching legal doctrine - so the overarching law dating back to the 19^th Century – pursuant to which the Courts have found that where after a contract has been entered into something happens, there is some sort of supervening event which is outside of the control of the parties, which makes performance of that contract either impossible or alternatively radically different, in those circumstances the Courts have found that a contract may be frustrated.

In those circumstances if a contract is frustrated the contract terminates immediately and crucially the parties are discharged from further performance of their obligations under that contract - be that payment, be that performing, whatever it is - so if a contract is frustrated then the contract is discharged.

Alex: Right, so now let us concentrate on frustration then. The old chestnut that gets wheeled out every time for frustration cases is the one regarding the coronation of King Edward VII and Alexandra in 1902; there was an avid monarchist who booked some rooms from which to watch the procession, but at the last minute it was cancelled, postponed in fact, and the procession did not go ahead, so he no longer wanted his rooms. He tried to wriggle out of paying the additional £50 for them and was sued by the owner of the rooms, but the Courts found that actually he was not liable to pay the further £50 because the contract had been frustrated.

So that is the one we all hear about, but have you got anything else by way of examples that might help us understand it a bit better?

Tom: Yes, so in short, that Krell v Henry case is an example of where an event is cancelled – or, as you say more accurately, postponed in that case. There are other categories which I can give you, in brief. One is where the subject matter of the contract, so something very central to the contract, has been destroyed. A good example of that is there is a 19^th Century case of Appleby v Myers, whereby party A owned a building and party B contracted to erect some machinery on the building. After the contract had been entered into there was a fire which was an accident, it was not the fault of either party, but the consequence was the building burnt down with the machinery partly on it.

Now in those circumstances the Court found that yes the contract had been frustrated because without the building it was not possible to erect the machinery on it - therefore this was a case the thing that was central to the contract had been destroyed and therefore the contract was frustrated.

Another category is that of requisition, where, for example, goods that are central to a contract are requisitioned - these are the sorts of cases that normally happen in war time. A good example of that is the First World War case of Shipton Anderson v Harrison Bros, which related to the sale of some wheat. After the contract had been entered into but prior to delivery the Government requisitioned the wheat in question; and again in those circumstances the Court found that it was impossible for the seller to perform and accepted that that contract had been frustrated.

The final category which I will just touch on is where it subsequently becomes illegal for the contract to be performed. Again, this happens often in war time, and the case which I will allude to here is a Second World War case of Denny Mott and Dickson Ltd v James B Fraser. This was a contract which related to the sale of timber. A contract had been entered into, and then subsequently during the war the Government passed a law which meant that timber trading became illegal. In those circumstances the Court acknowledged that, were they to perform the contract, both parties would have had to commit something illegal. Again, in those circumstances the contract was frustrated.

So there are a few more examples of contracts found to have been frustrated by the Courts.

Alex: You have wheeled out quite a few examples there, but from that we could easily get the impression that frustration happens all the time, but we know it does not. Listening to your examples it does become clear that they are all somewhat sepia toned if not in fact fully black and white. Does this suggest that frustration used to happen a lot more back in the day and the bar has subsequently moved upwards?

Tom: Yes absolutely. I think the bar has moved considerably since those cases and there are two reasons for that shift, and the first is the approach of the Courts. So over the years that followed the Courts have become increasingly reluctant to find that contracts have been frustrated. One of the reasons for that is that it is increasingly a basic tenet of contract law that parties are free to contract however they want. In those circumstances the Courts prefer to make a contract work than accept that it has effectively been defeated and the contract has been frustrated. They are very reluctant to allow a party to escape from what they consider to be a bad bargain. In those circumstances, if not quite bending over backwards, the Courts will certainly look very hard at the contract to see if it can still be performed.

Quite a good example of that is a case that, I would say is not black and white, but it is also not fully colour HD. It is a case from the late 1950s - so probably truly sepia toned, maybe just edging into colour - and it is the case of Tsakiroglou v Noblee Thorl. Now this may be a particular favourite or particularly memorable for any listeners who are UK Office fans - David Brent, Gareth Keenan era, and fans of the pub quiz scene - because it is relates to the Suez Canal. In this case the seller was a Sudanese ground nut seller based in Port Sudan and they contracted with a buyer based in Hamburg in north Germany; and pursuant to their contract they were due to deliver a shipment of Sudanese ground nuts to Hamburg. The keen geographers amongst you will be aware that the simple way to get from Port Sudan to Hamburg - and in fact you would have thought pretty much the only way, and the typical way certainly - would be to head left out of Port Sudan, up through the Red Sea, through the Suez Canal, through the Mediterranean and around Spain and France and up to Germany that way.

Unfortunately for the seller, when it came to the time to perform the contract in the November/December of 1956, the Suez Canal crisis was happening, such that the Suez Canal was closed from 2 November 1956 to navigation traffic. This was a bit of a problem for the seller, who could no longer get his ship up the Suez Canal - and so not surprisingly he failed to perform. The buyer sued for damages and in his defence the seller turned to the Courts and sought to appeal to the Courts saying "well this contract has been frustrated, as it was impossible for me to get my groundnuts through the Suez Canal, and therefore it is unfair for me to be sued for damages here". Unfortunately the Court of Appeal did not agree; whilst the Court acknowledged that yes, the Suez Canal had been closed at the relevant time, the Court also found that there was nothing to stop the seller rather than heading left out of Port Sudan to head right in the opposite direction and head all the way down the east-coast of Africa, around the Cape of Good Hope, all the way up the west-coast of Africa and onwards on the west-side of Europe and get the Hamburg that way.

Now of course this was an incredibly onerous requirement, an onerous obligation – the seller had to travel three times as far and it was also going to cost an awful lot more - but the Court said "well, look, there is nothing preventing this from happening, and this is just part of the bargain that has been struck". So in those circumstances where the goods were not perishable and there was no reason why the seller could not do that, the contract still worked, and the buyer was entitled to rely on it.

I think that is a very good example of the sort of approach that the Courts have tended to adopt, whereby they are very reluctant to find that a contract is frustrated.

Now I said there were two reasons. The first is the approach to the Courts. The second leads us on to the question of force majeure, because it is the proliferation of force majeure clauses that has also led to fewer and fewer frustration cases succeeding, and that is because, generally speaking, force majeure clauses will act to operate to the exclusion of the doctrine of frustration, because the Courts find that if a party has negotiated a force majeure clause it has struck its bargain - and it is therefore unlikely that there is going to be an event such that will found a successful defence in frustration, or otherwise lead the Court to find that the contract has been frustrated, where a force majeure clause is in place. That is not to say it is impossible but it is unlikely that if there is a force majeure clause the contract will be found to have been frustrated.

So as more and more force majeure clauses have been put into contracts it has been less and less likely that contracts have been frustrated.

Alex: OK, understood, but I think we need to check your stride a bit there because you are now talking about force majeure clauses. I think this would be a good time to go back right to basics and describe, what is force majeure, what is a force majeure event and actually importantly, what is a force majeure clause actually likely to say?

Tom: Well a force majeure event is the type of supervening event that we looked at in the context of frustration. A translation from French of force majeure is 'superior strength' and so we are dealing with that sort concept here, that is to say something that is outside of the control of the parties which is happening. And a force majeure clause is in essence just a contractual provision that provides a contractually agreed remedy if one of these things happens.

So classic examples are things like acts of God, earthquakes, volcanoes, floods, tsunami, these sorts of things. What you are doing is you are providing in your contact for what should happen in those circumstances. I think this takes us to a key distinction between force majeure clauses and frustration, which is that under the doctrine of frustration if a frustration event occurs - that is to say a contract is frustrated - the outcome is pretty binary; as we have discussed the contract is discharged and terminated, or it is not, that is the basic analysis. You either still have a contract or you do not. Whereas under force majeure provisions, because it is a contractually agreed remedy, the parties are at liberty to decide what they want to happen, so to determine if this event happens what should then happen contractually. And this is very important - and this is why force majeure clauses are popular - because often you do not actually want your contract to terminate just because something has happened. It may be, for example, that I own a factory on the banks of a river and that river is prone to flooding, but actually it only takes a couple of months for a factory to dry out and for me to get back to business so there is no reason why I cannot continue to supply in two months' time. In those circumstances, rather than our contracts concluding it may well be that we want to build that reality into the contract, so we say "well actually performance of the contract will just be suspended for two months", or three months, or whatever you decide. Alternatively it might just be that I am afforded an extension of time. Whatever it is, force majeure clauses give you that flexibility to decide what will happen.

That is not to say it is always plain-sailing, because there is always a question about whether the force majeure clause does apply or not, and that is something which ultimately will depend on how the clause is drafted and it will depend on the facts of the case - and that will be something that the Courts will need to determine.

Alex: Well quite, if what parties intended to happen always happened you and I would be swiftly out of business. So on the basis that these things are often not as clear cut as they might be, you talked before about the Courts' reluctance to find a frustrating event and those poor old long range ground nuts, but do they allow any more latitude with force majeure or are they adopting a similarly strict stance?

Tom: The short answer is a similarly strict stance; in the same way as the Courts' do not like frustration, they also construe force majeure clauses very narrowly, and are very reluctant to find that a force majeure clause applies. Now whether it does apply or not is a matter of contractual construction, but again the Courts are very reluctant, as they see it, to let a party out of a bad bargain. So if they feel this event is not properly a force majeure event, or that the force majeure event in question is not actually preventing the performance of the contract, then on those circumstances, depending on what the clause says, it may well be that they are unlikely to let a party rely on that clause. And there is quite a recent example, which again I will try to cover very quickly, but is a case that came out last month, the case of 2 Entertain Video Limited vs Sony Europe - and I think this demonstrates the approach that is being adopted pretty well.

The facts were as follows: Sony owned a big warehouse in North London. 2 Entertain Video were leasing the warehouse and were holding there a huge quantity of DVDs and Blu-Rays , millions of pounds worth of stock. Now in August 2011 you may recall there were lots of riots in North London - and during the course of these riots, some rioters broke into the industrial estate where Sony's warehouse was and set fire to the warehouse. The warehouse promptly burnt to the ground and all of the stock was destroyed.

So following this 2 Entertain sued Sony for their damages, to recover for their losses, and one of the defences raised by Sony was that there was a force majeure clause that covered just this kind of eventuality which would enable it to escape liability. That force majeure clause provided as follows:

"Neither party shall be liable for its failure in performing any of its obligations if such failure is caused by circumstances beyond their reasonable control including…"

and then there was a list of sorts of the circumstances, one of which included "riot".

So you would have thought, standing back, that Sony was on pretty good ground here, because they had expressly identified the force majeure event in the force majeure clause, which was riot, and riots are actually beyond the reasonable control of parties, being civil unrest; so in all their circumstances one would have thought that Sony was on pretty solid ground. But in a way that shows the approach taken by the Courts, you might be surprised to hear that the Court did not agree, and found that this force majeure clause was not engaged. The facts are fairly complex, but the reason why was, whilst it was accepted that the riot was beyond the control of Sony, the security of the building was not up to scratch by all accounts, and also there were not sufficient sprinklers installed within the warehouse - and in all those circumstances the Court found that this was not something that was truly beyond the reasonable control of Sony, and so in that case the force majeure clause was not engaged.

This was not a huge part of the judgment but I think it does just show, again, the kind of approach that is being adopted whereby the Courts are reluctant to allow parties to escape from what they consider to be bad bargains by relying on force majeure clauses.

Alex: Okay. Well you have given us a good general overview but so far I think the Judges have done most of the analysis, so it is time to turn up the heat a bit. We have promised that we will actually apply this to some current affairs, and miraculously neither of us have mentioned Coronavirus in about the last twenty minutes, which is frankly amazing, but we are going to push it a little bit further and by way of a bit of nostalgia, we are going to talk first about Brexit, which I have almost missed doing. So how do you rate the chances of Brexit being classed as a frustrating event, or as a force majeure event, in the eyes of the Courts?

Tom: I am going to ignore the easy joke about Brexit being a frustrating event. Looking at Brexit in the context of force majeure and frustration, the good news is that I am not going to be talking about this for very long, because I think the prospects on both counts are poor.

So as regards Brexit constituting an event of force majeure or engaging force majeure clauses, it obviously will depend on what the clause says. But in terms of your typical force majeure clauses it is hard to see how Brexit will be a force majeure event. It is certainly not an act of God, notwithstanding how the Prime minister may view his impact on Brexit, so it is not an act of God and it is unlikely to fall within that class of event, so I think there will have to be a slightly unusual wording for Brexit to fall within a force majeure clause.

And the second point, perhaps as importantly, is that even if it did fall within the clause, from a causation perspective it is going to be difficult for parties to establish that Brexit is actually, depending on what the wording says, preventing performance. So if the requirement is to prevent performance, it is difficult to see that Brexit has prevented performance. It might be, for example, that if you are trying to ship goods overseas that actually it is taking an awful lot longer because there are delays at the ports and so on. But the question is, is that actually preventing performance or is just making it a bit more onerous? If it is just making the contact more expensive to perform, for example, and that is not going to be considered to be preventing performance and therefore you will not have got the option to rely on force majeure.

So I think the prospects of force majeure clauses helping parties out who are seeking to rely on Brexit as an event of force majeure is poor, and I think the outlook for frustration, for parties relying on Brexit as a frustrating event, is also poor. And the reason I am confident about that is because of a case that was heard last year, which we dealt with at a previous ThinkHouse Foundation Session, which is the Canary Wharf vs European Medicines Agency case. Because we have dealt with it previously I am not going to go into it in a huge amount of detail, but at a very high level this was a particularly extreme set of facts whereby you had a European entity, whose headquarters as of 2010/2011, were situated in London. They took a lease of significant space in Canary Wharf for their European headquarters and subsequent to Brexit, whereby we are leaving the EU, they were not unreasonably seeking to argue that they could not possibly have their headquarters outside of the EU and therefore that their contract had been frustrated.

So really extreme facts - and all the same the Court found that the contract had not been frustrated. The Courts looked very closely at the contract and found that there were some assignment provisions in there, there were some sub-letting provisions in there, which the Court found, even though it could not be suggested that in 2011 Brexit was anticipated, provided for a way in which the EMA could deal with the property without being based there as its headquarters - so there was effectively contractual provision dealing with this eventuality and, in those circumstances, the contract had not been frustrated.

So the headline really is that even on what was a very unusual case at extreme end of the spectrum, even then the Courts did not buy that Brexit frustrates the contract, and so I think parties seeking to rely on that - it will obviously depend on the facts of each case - but they will have an uphill struggle.

Alex: They are going to need some niche facts. Okay, well Brexit is a no-hoper then. I think we have staved it off for as long as we possibly can. COVID-19. Has that got any better chances of clearing this exceptionally high bar?

Tom: Well I think it has. Taking force majeure first, I think within your classic force majeure clause, COVID-19 is likely to fall within that. Taking for example the precedent on PLC, the long-form precedent, I see that expressly makes reference to "pandemic". Well COVID-19 is a pandemic, so in that regard it will be a force majeure event. I think actually it probably is also an act of God on a microscopic level too. So I think it is likely that COVID-19 will be a force majeure event under a lot of contracts.

The key will be whether, again depending on what the clause says, whether it has actually prevented performance - so there is again a key causation question here and I am sure parties will be seeking to draw a distinction between COVID-19 making performance more difficult and actually preventing it. You can quite see that, for example, where there are Government guidelines in place, is that actually preventing performance? If the guidelines are let's say in respect of social distancing, where you have to be two metres apart, and in your factory you require people to be closer than that, are the Government guidelines actually preventing you from operating or just deterring? That is going to be a difficult question.

Similarly, I think it will certainly be argued that the availability of employees is being affected by people having to self-isolate, but the counter-argument will, of course, be that you can put provisions in place such that you source more employees, or so that you have scenarios worked out whereby you can deal with pandemics. And so I think the battleground of force majeure clauses is likely to be causation, rather than whether or not it is a force majeure event –but I think there certainly are prospects, not without complications, of COVID-19 leading to successful claims of force majeure.

And similarly, on frustration, I can actually see contracts being frustrated because of COVID-19 which is almost a departure from what has happened over the last 50-60 years. And the reason I say that is that with the passing of the Coronavirus Act and with the sort of things that are happening, or can happen, under that Act whereby goods can be requisitioned, whereby ports can be closed, events cancelled, we are on a sort of war footing as mentioned by politicians, where circumstances which are more akin to the kind of circumstances which led to contracts being frustrated in the First and Second World War. So if I am contracted to provide you with face masks, Alex, and I entered into that contract last August, before anyone had heard of COVID-19, and I was due to be delivering them now but all of a sudden they all got requisitioned by the Government to give to the NHS, I can quite see that in those circumstances a contract might be frustrated.

So I think on both accounts there are prospects of parties relying on force majeure provisions or frustration. That is not to say that it has suddenly become easy to argue that a contract has become frustrated or to rely on a force majeure clause, as the Courts will still necessarily test and test hard whether that is the right finding. But I do think the circumstances are such that it is more likely that parties may be able to rely on force majeure clauses and may be able to argue that contracts have been frustrated.

Alex: Oh great. It is probably a bit more positive, although of course you know it cuts both ways, because just as there will be people desperately trying to extricate themselves from contractual obligations, equally in supply chains it means that there will be people fighting desperately to hold people to their contractual obligations. So bearing that in mind, that the point cuts both ways, what practically do people need to be doing whichever way they are looking at this? What should they be doing now with existing contracts?

Tom: It is fairly trite and basic advice, but the key, as ever, is going to be to dig out the contract and to work out not only what the force majeure clause says, which is going to be very, very important, but they also need to look very carefully at what the contract says as regards your contractual obligations for performance. What is it that you actually have to do? And is there a way in which the same result can be achieved another way? You know that is going to be very, very important.

And so once you have worked out what you need to do and what the force majeure clause says, you then also need to apply that to the facts. And it is that sort of forensic application, in particular looking at things like causation, which is going to be key. And only once you have done that can the parties stand back and come to a view on whether this is a force majeure event and the force majeure clause applies or whether actually, for example, prima facia this is a pandemic and a pandemic was in your force majeure clause, but actually it has not prevented performance. And so you need to undertake that exercise very carefully.

A final thing, which should not be forgotten, is if it is established that let's say there is a force majeure event, and the force majeure clause may apply, and even if it is actually a nailed on case, you need to remember to notify the other side, in order to comply with any notice provisions. Notice provisions for force majeure clauses, are sometimes conditions precedent, that is to say if you do not give notice then you will lose the right to rely on a force majeure clause. So you need to remember that final element which is also to engage with the other side.

I should in that regard stress how important engaging with the other side is, because at the present time in particular in supply chains it may well be that the best solution for everyone is not for a party to be relying on its strict contractual rights and to be relying on what the force majeure clause says. It might not be a very good force majeure clause - that is to say that actually exercising the options under force majeure clause may in fact not be in either party's interest. So rather than having a legal argument about this, arguing about whether a contract is frustrated or whether a force majeure clause is engaged, it is the reaching out to your counterparty which may be the key thing to do here, because there may be another commercial arrangement which is much more advantageous to both parties and I think everyone should not lose sight of that, particularly where it is hoped - and we will see what happens of course - but it is hoped that actually the present circumstances whilst extraordinary will not be going on for ever and it may be that normal service can be resumed sometime in the future. Now in those circumstances rather than entering into significant legal wrangles now it may be that counterparties can hold the ring and work with each other for a while, and then as normal service is resumed so adapt their practices accordingly.

Alex: We have got a question from the floor I think which fits in now which is about performance of obligations and the question is "If payment is the sole obligation of a party could they still successfully argue that COVID-19 is preventing them from performing?"

Tom: So I guess it depends, if you are relying on a force majeure clause, it depends on what the contract says so - if say if your sole obligation is payment and you are saying that COVID-19 is preventing payment, well it would depend on the facts but that seems to me standing back to be quite a difficult argument to raise as to why COVID-19 would be preventing payment, I think.

Alex: Unless it was physically preventing payment, your bank had cease to function or what have you.

Tom: Yes I think unfortunately my answer to that needs to be that I think it all depends squarely on the fact and on what the clause of the contract say - but force majeure will relates to all obligations, so if there was a particular reason why payment was impossible then that is not to say that performance of that obligation might not be prevented. It is the same as any contractual obligation, it is not just the manufacturing of things that may be stopped, in principle I suppose payment could be prevented too. I guess I am just struggling slightly to see the specific scenario - and I think "I have run out of money" is probably not going to wash as an argument

Alex: That is what I am thinking, non-payment simply because not having money due to downturn in business from COVID-19 is not likely to get off the ground you think?

Tom: Yes I think that is highly unlikely. I think you would have to look pretty closely at your contract but I think you are unlikely to escape on that ground.

Alex: Fine right now we are going to dare to indulge in a bit of tentative optimism and look to the future. I heard this great quote from an excellently named band called Half Man Half Biscuit and their song which is "the light at the end of the tunnel is just the light of an oncoming train". That is suitably pessimistic for me, but cheering myself up for a minute and daring to hope that there will be new contracts in the future, what do people need to think about with upcoming contracts and what do they need to be looking to put into those? And I'll tack onto that as well, because there is a question from the floor about future contracts as well, which is "how should we deal with requests to include COVID-19 as a named force majeure event in a contract and can we push back on these requests?"

Tom: Well I will try to sweep up both of those in one. I think the key is you have to do something - so let's say you enter into a contract now, and then turn around again in three months' time and unfortunately the situation has deteriorated and there is a second lockdown which is materially affecting your business. In those circumstances you are not going to be able to turn around to the Court and for a Court to find this contract is frustrated. I just think that is highly unlikely because the Court will find that you have entered into a contract at a time where COVID-19 could not be more squarely in our sights as something that is happening. Everyone is aware of it, it is entirely foreseeable and in those circumstances, when you struck your contract you have struck your bargain and that bargain, if you have not made reference to COVID-19, well that is a choice that has been taken.

So I don't think you can do nothing. If you are wanting to deal with it you need to deal with it head on; so deal with it within a force majeure clause, and then it just comes down to a question of contractual negotiation and what you can agree with the other side. So in answer to the second question, as regard can you refuse this, well I think you can, that is just part of your general commercial negotiation. I don't think this is something where it is sort of a question of morality or anything like that; and I think you need to bear in mind or the other side will probably bear in mind that if it is not dealt with in the contract, if you are silent on the contract, you are probably not going to be able to subsequently turn around and say "well, the contract is frustrated". The fact that it is not dealt with in the contract will be regarded as part of the contractual bargain.

Alex: I think there is an implication in the question at least that because I guess there is a complication in that COVID-19 is ongoing so it is a known threat now, it is a known event, it had begun but as we keep being told it could resurface so basically is there a way, does that have an impact on how you deal with it contractually in that it is a known and ongoing issue?

Tom: Well I think the recommendation would be to thrash it out, and to actually deal with what it is you want to happen. So the exercise you always have to undertake is the converse of what we have been doing when looking at whether a force majeure clause applies. You want to retrospectively look at what you want to happen, what it is you are concerned about, and to give the court the minimum amount of leeway when the event happens to then find that this isn't an event of force majeure and so the clause hasn't bitten. So taking Brexit for example, obviously we are currently in the transition period and without an extension at the end of the year we will be exiting on WTO terms.  Now if for some reason in the context of your contract that is something which you are not prepared to continue under, then you will need to be putting some provision in that will specifically apply in these circumstances. I think that is the way you need to deal with it, rather than leaving it to the last chance saloon of the Courts; rather than having the trouble the Court you just need to deal with it upfront.

So, yes, COVID-19 is on ongoing situation, but in those circumstances you need to adapt your boilerplate force majeure clause, building into it the fact that you want to trigger it; it might be that your business for example is dependent on people coming in from overseas, and suddenly a 14 day quarantine period is going to cause significant issues, in which case, try to build in some provisions relating to quarantine periods. Now this is all difficult of course because we don't know what the next few months will hold but whilst I have said the Courts will construe force majeure clauses narrowly that doesn't mean that with clear drafting we cannot cover a comparatively wide range of scenarios - it just needs the drafting to be even clearer than usual to ensure the Court has no latitude and has to find if certain things happen that the force majeure clause is engaged.

Of course the better drafted it is and the more than you engage with your counterparty at this point, the less likely this is to be able to get near a Court. This goes back to the cooperation point that I made earlier. If you are dealing with these issues with your counterparty now it may be that actually you can work out commercially what is going to happen such that there is absolutely no debate what happens in certain scenarios; and where the parties have actually thought about these things, rather than people panicking and suddenly reaching for the contracts and looking at the force majeure clause, everyone will be very aware in the commercial deal they have struck of what may happen in the future and what is then supposed to happen on certain events occurring. So I think cooperation is absolutely key, and as much as possible just dealing with these things up front. I'm afraid this is not going to be the case where you can enter into contracts now with any confidence by just inserting a boiler plate. You know these clauses now suddenly have become front and centre and need to be negotiated hard.

Alex: Yes, give it some serious thought and really air it, that sounds sensible. We haven't got time for a load more questions now but I have got one, I think is a good one because it certainly seems to be a problem that is cropping up an awful lot and that is about supply chains and the question is "in a supply chain if you yourself have not been impacted by a frustrating or force majeure event but somebody else in your supply chain has, does that then essentially create a knock on effect whereby you can then say that your contract with whoever you are supposed to be supplying has been frustrated, or become a force majeure event?"

Tom: So de facto no; it will all depend on what your contract says with your respective counter party, and this is the situation we see often and is very problematic where the contracts are not back-to-back as regards force majeure provisions. So it may well be that downstream in your supply chain there is a force majeure clause which bites in the current circumstances, but actually although it is affecting your supply when it comes to your contract upstream there is nothing in that case which per se is stopping you from performing except for the fact that you haven't got the goods from your supplier. Well unless there is provision in your contract with the counterparty to deal with that, you can be left in the middle and exposed; so that is why it is really important that the contracts are back-to-back or make express provision within the force majeure clause for what happens if you are in effect let down by one of your suppliers.

Alex: Sensible. Ok, well I think time-wise reluctantly we ought to probably bat on to turn the tables.

Tom: Yes that is very good news; this is where I get to have my fun. One of Alex's many areas of expertise is one which causes him to don an insurance cap, which I certainly don't own, and in that context we did promise to cover off some insurance questions in this session. So turning to you, Alex, as a preliminary point, given what has been happening with COVID-19, what should policy holders be doing, probably as a matter of urgency, at the current time?

Alex: Yes, it is a matter of urgency. Unfortunately much as I wish it were, my advice is no more dynamic than yours but I have reduced it, as is fashionable at the moment, it to three pithy headlines:

Act now to ensure you check your policies and notify claims; be prepared to challenge, because you are almost inevitable going to end up in a scrap with your insurer; gather evidence.

So just running through those in turn, it is the same advice that you gave about contracts which is essentially get your insurance policy out of the drawer that you put it in the day you received it, dust it off and have a good look - and actually not just at a policy singular but policies plural. Make sure you have a clear idea of all the cover that you have got available in varying layers and varying different types of insurance, and really have a good read of it. I mean the likelihood is if you have business interruption insurance you probably know or ought to know whether or not you have relevant extensions, but read the language because that is what it is going to come down to. It is not necessarily going to depend on what insurers were intending, it is going to depend a lot on what is on the page. So find the relevant bits of your insurance policies that may or may not deal with it. Read them, and then make your insurance brokers do some work. Get in touch with the insurance brokers or your insurers direct if you are not with a broker, get in touch with them and get the communication channels open because it is important not least for notifying claims. Notification provisions again - check those parts of the policy but open up the lines of communication and you can draw out the arguments and you can start having the debate with insurers about the wordings of your clauses and what the coverage is - and we have seen a load of that, we have seen a lot of back and forth, and it is important for people to start doing it sooner rather than later.

Also gather evidence. So now the losses are probably ongoing. Your life is going to be a lot easier in the end if you do end up in a wrangle with your insurer if you have got a really clear idea of what losses you have suffered and you have got a really well organised record of all of the evidence that you need that means you are going to be able to take swift action when required. And it is really going to help you out a lot so take those steps, get your policy out and have a look at it, make notifications, open up the lines of communication, be prepared to challenge, but in the meantime gather your evidence, and as a secondary point look at what is going on, get in touch with any trade organisation that your business is a member of and ask if they are taking any action, because several are.

Look around and ask around about class actions. Two large groups are currently trying to take on Hiscox who are unfortunate enough to have an extremely broad business interruption policy definition and then have declined a load of claims so they are coming under a lot of pressure. So look around and see if anybody is taking joint action because that could (a) save you time and (b) save you quite a lot of money if there is a band wagon that you can jump on rather than paying large sums to get advice on your own. And lastly, not for everyone but for smaller businesses, look at the financial ombudsman service; there is a threshold I think of turnover of less than £6.5 million and fewer than 50 employees or a balance sheet of less than £5 million. If that is your business then you can go in through the financial ombudsman service where you get support and it is a quicker and cut price route potentially to a solution.

Tom: You talk about wrangles and arguments and class actions. That suggests to me that insurers are perhaps not departing from previous typical practice, but are seeking to avoid coverage wherever possible. Is that the approach that is being adopted?

Alex: Totally. There are a lot of uncertainties, and it is easy to paint insurers as the bogey man, but actually there is a lot of uncertainty. As we mentioned earlier, it is still an ongoing event and it so far difficult to work out what the implications are. But yes, funnily enough, true to form the general approach is not immediately parting with large sums of money, and this has triggered a response. The FCA has issued an edict to insurers - on the one hand acknowledging that most policy holders will not have cover for pandemics so the majority of people probably will not be covered - but in the cases where it is quite obvious that they are covered the FCA has basically issued an edict saying that those claims need to be paid ASAP. But in the interest of balance, from insurers, perspective a policy is a contract like any other, and it says what it says, and so it is going to come down to an interpretation of the policy wording and if you have ever read an insurance policy you will know that they are often not the clearest thing in the world. It is not necessarily easy, no matter anyone says, no matter what the public policy position, it is not easy in a lot of cases to do the untangling. So from the Government perspective they would love insurers to be paying out to lots of policy holders to get some heat off them, but from the insurers' perspective the insurers are saying "well we are not here to underwrite the British economy".

Unfortunately the likelihood is that there is going to be a lot of litigation, a lot of wrangling. Some good news: the FCA and the Financial Ombudsman have said that they are going to bring some test cases as soon as possible. So again that might provide some clarity, in essence if you reserve your position with the insurer and then hold on tight, it may be that some of these issues come out in the wash through these test cases that are coming.

Tom: Now that is very useful on a macro level; but on a more micro level, have you got any sort of personal experience of things that have come across your desk over the last few weeks which perhaps demonstrate the kind of issues that are being thrown up?

Alex: Certainly, we have seen a variety of issues. It is essential to point out that policy wordings vary wildly, both in their substance and in their style, so you get an enormous amount of variation and all sorts of different combinations; but one which has cropped up more than once is the issue to do with SARS. So SARS the existing disease is mentioned in some disease clauses. One I was looking at was where SARS was listed as a disease that was covered, and perhaps unsurprisingly the insured wanted to say that if SARS is covered, COVID-19 is in fact SARS coronavirus 2, and SARS was SARS coronavirus 1, so COVID-19 should be included as SARS and should be covered under the policy. The insurer response was that whilst SARS the disease was so named by the WHO stemming from the SARS coronavirus 1 virus, when it comes to the SARS coronavirus 2 virus the disease caused by that has been named by the WHO "COVID-19", actually to distinguish it from SARS; so it is not covered.

But far more tellingly than that is we have seen the same thing where SARS is excluded in the policy and insurers are trying to argue that COVID-19 is included in the definition of SARS and is therefore excluded! So we are seeing these things cutting every which way and that is a prime example of the kind of scraps we are going to have, and they are going to come down to the absolute minutiae of the wording.

Another one, a really common one which is coming up, is clauses in contracts about distance, so saying a disease is covered if there is an outbreak either on your premises or within 25 miles that causes your premises to be closed. Here insurers are frequently saying the reason we have that provision is because cover was not designed to be for a national pandemic or indeed a global pandemic, this was for a case of botulism in your factory that caused your factory to be closed, whereas now if your factory is closed it is because the Government has issued instructions based on the national situation rather than the situation as particular to you – so cover is declined.

How is this resolved? Well see above regarding approach: this is the same scenario, there is going to be all sorts of wrangling about it, all sorts of arguments and no two clauses are phrased exactly the same way, so we are going to have some interesting distinctions drawn I think.

To: Sounds like a lot of work for you for the weeks and months ahead Alex.

Now I can sense kettles being put on up and down the country as people are desperate to get their mid-morning cup of coffee, and we are overrunning, so just a very quick final question for you before we wrap up:

How about policy renewals - so let us say a policy is due to be renewed in the next few weeks or months, what should parties be thinking about in that regard, in the same way as if you are now renegotiating contracts?

Alex: It is going to be very interesting. The same advice that you gave which is step 1 is think about it and think about it pretty hard, and talk to your broker about it, talk to your insurers about it. Air the issue. A notable example is Wimbledon, as in the Wimbledon tennis championships, that has by all accounts been buying pandemic insurance cover for the last 17 years since SARS, old SARS, and are reckoned to have spent about £25 million on their pandemic insurance cover, and have just made a successful claim for £144 million under that policy, so that looks like a pretty good investment. So there could be a huge rise in people looking to take out specific pandemic cover. However, there are other historic examples of things that happened where that is not necessarily the right option: New Madrid is spot at the bottom end of Missouri where there was an earthquake in 1811 and 1812 and it has never happened since, but people are still paying insurance premiums to cover off the risk of another New Madrid earthquake.

So it depends on how the world views it, as to whether or not we have entered an age where a pandemic is going to be coming around the corner every five minutes or whether maybe we have learnt our lesson and will behave differently. So it remains to be seen but it is highly likely, looking at what has happened in the past with terrorism insurance and other situations where it has become clear that the insurance industry on its own is unable to deal with the scale of the event, is that Governments step in and set up reinsurance pools and that sort of thing; and there is already a group that has been pulled together to think about, that which is being advised by our terrorism reinsurance back up group. So I think there will be some sort of Government backed response to try to deal with it but as yet, it is just a waiting game, so talk to your brokers, talk to your insurers and think about it.

Tom: Well watch this space.

I am conscious that we are squarely at the end of our time, and so thank you to you Alex, and thank you to everyone who has tuned in to join us this morning. We look forward to hopefully seeing you again in person in the future, but it is bye for now.