Covid 19: An act of God?

Associate Andrew Langan-Newton considers the implications for contracts governed by Isle of Man law in the event that the Covid-19 epidemic restricts contractual performance.

Covid 19: An Act of God?

Since the first European case of Covid-19 was identified in France in January 2020, incidences of infection have been rising leading to the Director of Public Health in the Isle of Man to state “’It’s only a matter of time before the coronavirus arrives here” (although, as at the time of writing there have been no reported cases in the Isle of Man).  In view of events across the World, day-to-day business could be disrupted, although as yet we cannot anticipate as to what scale.  Isle of Man law governed contracts could be subject to non-performance as a result of Covid-19 arriving in the Isle of Man.  In such circumstances, this article considers the contractual provisions that could absolve parties from obligations under contract.

The Force Majeure Clause

A common provision in contractual agreements is a ‘Force Majeure’ clause that, if engaged, acts to cancel the contract between the parties to it or excuses or suspends performance of elements of the contract.  The Force Majeure clause (latin for ‘superior force’ and commonly referred to as an ‘Act of God’) sets out specific circumstances whereby, if coming into effect, the parties agree to limit or excuse performance of the contact.  Common examples of Force Majeure events are earthquakes or extreme weather events but Force Majeure clauses can also be drafted widely to incorporate, for example, labour disputes and the defaults of third parties to a contract.   

There are however limits to the extent a Force Majeure will excuse a party from contractual obligations.  The drafting of a clause must be sufficiently clear for contractual certainty and in the case of consumer contracts, a Force Majeure clause will be subject to the requirement of reasonableness under section 6 of the Misrepresentation and Unfair Contract Terms Act 1980 (an Act of Tynwald).

In the case of the Covid-19 epidemic affecting contracts in the Isle of Man, the burden of proof will be on the party seeking to rely on a Force Majeure clause.  Although an opinion on the efficacy of a Force Majeure clause should be on a case-by-case basis, in general terms the party would have to prove: –

• That the non-performance of the contract was beyond that party’s control; and,
• There were no reasonable steps that could have been taken to avoid or mitigate the event or its consequences.

Frustrating the Contract

Not all contracts contain Force Majeure clauses but events outside of the control of the parties to an Isle of Man law governed contract can result in the discharge of contractual obligations for contractual parties under the doctrine of frustration.  

In the Isle of Man judgment of Lourie & Otr v Marketstheworld SUM 2017/0015, High Bailiff Needham (as he was then) considered the doctrine of frustration under Isle of Man law with reference to the definition of the House of Lords in Davis Contractors Ltd v Fareham UDC [1956] 2 All ER 145, [1956] AC 696: –

‘… frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.’

In the event of a Covid-19 epidemic in the Isle of Man, for the doctrine of frustration to be engaged a party seeking to rely on the doctrine would have to prove that the circumstances were “radically different” meaning performance could be excused.  High Bailiff Needham went on to consider, with reference to the judgments of England & Wales, that the test of “radically different” is not lightly invoked and that the mere incidence of expense or delay or onerousness is not sufficient to engage the test.  Advice on whether the circumstances of a contract have changed in a “radically different” manner due to the Covid-19 epidemic would be on a case-by-case basis. 

If a party to an Isle of Man governed law contract can prove the test for frustration is engaged by events relating to the Covid-19 epidemic, the Law Reform (Frustrated Contracts) Act 1944 (an Act of Tynwald) provides for how the parties apportion benefit from performance of the contract that has already taken place.

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The guidance in this note is for information purposes only and is not intended to be exhaustive. It is not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Cains accepts no responsibility for any errors, omissions or misleading statements or for any loss which may arise from reliance on the information in this note.