Thinking | 2 April 2020
The term 'act of God' appears regularly within contracts, but is not a concept that is defined under statute. Despite this, its meaning is important, as an 'act of God' may trigger a right for a party to delay performance, suspend obligations, or even terminate a contract. In light of the COVID-19 outbreak, many parties are considering whether the outbreak itself is an 'act of God'.
Although the best way to achieve certainty is to clearly define what constitutes an 'act of God' or a force majeure event (see our related article for further insight), this almost certainly will not be possible for contacts already on foot.
What guidance have the Courts provided?
Without providing a strict definition of an 'act of God', Courts have outlined the following three key considerations relevant to determining whether an event constitutes an 'act of God':
- Did the event arise as a result of natural causes and without human intervention?
- Was it impossible to reasonably foresee the occurrence of the event or its consequences?
- If it could have been foreseen, was prevention through the application of reasonable skill and precautions impossible?
However, when applying this to a specific contract, it also needs to be carefully considered whether the event itself caused the non-performance or delay, or whether this may have occurred as a result of a human response to the 'act of God'.
Is the COVID-19 outbreak an 'act of God'?
Applying the Court's guidance to the COVID-19 outbreak, it seems likely that the outbreak itself would be considered an 'act of God'. The speed with which the virus has spread, and the difficulties with containment, suggests that it has arisen due to unforeseeable and unpreventable natural causes.
However, non-performance of contractual obligations is, in the current situation, occurring largely as a result of Government restrictions, or precautions taken by businesses in light of the outbreak, rather than as a result of the outbreak itself (eg mandatory or elective shutdowns).
It is therefore possible that any human intervention to prevent or address the COVID-19 outbreak may not constitute an 'act of God' and would have the effect of breaking the causal chain between the original act (eg the virus outbreak and pandemic) and the inability to perform contractual obligations.
However, given the close proximity of the COVID-19 outbreak itself and the Government restrictions, a view may alternatively be taken that the nexus between the 'act of God' and non-performance is not severed.
Given that this issue is not settled, where a party is seeking to rely on a contractual provision referring to an 'act of God' in the context of the COVID-19 outbreak, their position needs to be clear on whether the relevant non-performance has arisen because of the pandemic itself or a human intervention in response to it.
For example, a party may assert that they are terminating a contract due to the impact of the pandemic itself, rather than in response to concurrent Government intervention restricting their operations.
What should you look out for in your contracts (existing and new)?
On the basis of the above, there are certain fundamental checks you should undertake when reviewing contracts on foot, and also when preparing to enter into new contractual arrangements:
- What is the governing law of your contract? Courts in different jurisdictions may apply the 'act of God' concept quite differently.
- Does the contract have a clearly defined force majeure clause, which:
- sets out the various acts or events that will allow a party to suspend performance of its obligations (including pandemics)?
- provides for an appropriate regime during and after the relevant act or event – eg in terms of the time for suspension, rights to walk away, other rights to mitigate or respond to the situation?
- uses language which is clear and not ambiguous in meaning?
- How do the termination rights of the parties fit in with the force majeure regime, including rights to terminate for convenience on the giving of notice?
- Are there any compensation rights (eg liquidated damages) that may apply in these sorts of scenarios (whether intentionally or unintentionally)?
- Are your contractual obligations in these 'act of God' scenarios covered by the insurance policies you maintain (particularly with regard to exclusions that could apply under these policies)?
James has particular expertise in equity capital markets, corporate transactions, and public and private M&A.
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Consultant Noel is a corporate & commercial lawyer who advises on commercial disputes, banking & finance and insolvency.
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Special Counsel and Head of Frank
James has 10 years' experience as a corporate & commercial lawyer working across a broad range of commercial transactions.
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