Force majeure and COVID-19: claims of the unexpected

When the UK went into its first lockdown in spring 2020, the focus of lawyers naturally turned to force majeure and the scope for invoking it in the context of the COVID-19 pandemic. Since then, there has been relatively little by way of judicial consideration of the issue. Perhaps companies have heeded the government and other organisations’ calls for co-operation rather than escalation, or maybe the first wave of these claims is yet to come.

In the meantime, a recent decision in the High Court offers an interesting analysis of a force majeure claim arising out of the pandemic and, in particular, the application of the Braganza duty (Dwyer (UK Franchising) Ltd v Fredbar Ltd and another [2021] EWHC 1218 (Ch)).

Dispute over force majeure

Dwyer concerned a franchise agreement (the agreement) in relation to the “Drain Doctor” plumbing and drain repair services franchise. Dwyer (UK Franchising) Ltd was the franchisor and Fredbar Limited was the franchisee, which was run by Mr Bartlett who was also its guarantor. The case was portrayed by Mr Bartlett’s counsel as a major company against a man in a van.

The agreement contained a force majeure clause, which provided that the agreement would be suspended during any period that either party was prevented or hindered from complying with their obligations by any cause that Dwyer designated as force majeure, including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder and natural disasters.

On 27 March 2020, Mr Bartlett contacted Dwyer to explain that the pandemic had resulted in a lack of calls and business, and to raise the possibility of suspension of the contract under the force majeure clause. At the same time, Mr Bartlett emphasised that he would do all he could to continue trading. Dwyer’s response was relatively neutral but referred to emergency drainage and plumbing being a key industry.

On 30 March 2020, Mr Bartlett sent Dwyer a copy of a notification received from the chief medical director for NHS Wales stating that Mr Bartlett’s young son was clinically vulnerable and recommending self-isolation for the next 12 weeks. Dwyer responded on the next day that it would be for Mr Bartlett to decide whether to go into isolation. Mr Bartlett explained that if the low number of jobs continued he would be at risk of insolvency and unable to trade. He requested suspension under the force majeure clause, setting out detailed reasons including self-isolation for the protection of his son.

Later that day, Dwyer emailed Mr Bartlett stating that the force majeure clause did not apply just because there were fewer jobs. Service could still be provided as this was a key industry, even though the service might have to be provided differently.

There was further correspondence between the parties, however, Dwyer continued to reject Mr Bartlett’s approach to the force majeure clause, and threatened termination of the agreement for breach if payments were not made. The High Court later noted that this was a most unattractive approach within the COVID-19 context, whatever Dwyer’s contractual rights, and represented a failure to treat a franchisee compassionately in the context of exceptional circumstances that required all companies to adopt a reasonable approach rather than to apply strict legal rights.

During this time, while maintaining its stance on force majeure, Dwyer made an offer on 2 April 2020 that, if Mr Bartlett suspended operations to self-isolate, it would waive payment. On 24 April 2020, Mr Bartlett accepted the offer.

However, in July 2020, Fredbar purported to terminate the agreement. Among the grounds for termination identified in Fredbar’s letter of July 2020, and as set out in the defence and counterclaim, was an alleged failure by Dwyer to comply with the force majeure clause. Dwyer subsequently terminated the agreement in August 2020 on grounds of repudiatory breach. Dwyer then issued proceedings against Fredbar and Mr Bartlett.

High Court decision

While ultimately the court held in favour of Dwyer on its entitlement to terminate the agreement, it did find that Dwyer was in breach of the force majeure clause. The clause bestowed on Dwyer sole discretion to designate a force majeure event. Applying the principles in Braganza v BP Shipping Ltd and another, the court found that there was an implied term that this power of designation must be exercised by Dwyer honestly, in good faith and genuinely ([2015] UKSC 17). It could not be exercised arbitrarily, perversely or irrationally. Dwyer was obliged to take into account matters that were relevant and ought to be taken into account, and conversely not to take irrelevant matters into consideration. Provided that this was done, the decision was one for Dwyer’s discretion but the court could set it aside if it was one which no reasonable decision-maker could have reached.

The court held that Dwyer had not exercised the discretion in accordance with the implied term because a critical factor had been ignored for the purposes of its decision. That is, Dwyer remained focused on the effect of the COVID-19 pandemic on turnover by reference to demand as its reason for deciding that the force majeure clause did not apply. It did not take into consideration the need for isolation for family safety.

Fredbar had argued that the failure to exercise the discretion was a repudiatory breach, which justified its subsequent termination of the agreement. The court agreed that the clause was a fundamental term which went to the root of the commercial purpose of the agreement and that it had been breached by Dwyer. Alternatively, it was an intermediate term that potentially entitled Fredbar to terminate, depending on the seriousness of the breach.

However, by going on to accept Dwyer’s offer of 2 April 2020, Mr Bartlett had affirmed the agreement. Consequently, there was no ground for termination on this basis by July 2020.

Specific wording and intentions

Whether or not the COVID-19 pandemic constitutes a force majeure event will hinge on the specific wording of an agreement and the intentions of the parties at the time of contracting. Most of the focus to date has been on identifying what events are included within a given clause, for example, whether:

• There is any reference to an epidemic or global health emergency.
• The event must prevent, or merely hinder, performance.
• There are any control measures around the clause, such as that the event cannot be reasonably foreseeable.
• There are time limits for invoking the clause.
• There are obligations to mitigate.
• The clause contains a discretion in the hands of one party only to designate a force majeure event. This will almost certainly engage the Braganza duty. If it does, Dwyer underlines the requirement for the party with the discretion to take into account all relevant factors, which may include the personal circumstances of the other party as a result of the pandemic.

While not determinative of the legal issues, it is also worth noting the court’s criticism of Dwyer’s approach to the issue and the lack of compassion shown towards Mr Bartlett. The judgment underlines the expectation, which was voiced by the government and others early on in the pandemic, that parties should be constructive when in dialogue over disputes arising from the pandemic and not focus solely on enforcing legal rights.

This article was first published in Thomson Reuters Practical Law.