How does Coronavirus affect my commercial contract?
Ian Machray examines how COVID-19 may impact commercial contracts.
We are already seeing severe disruption to businesses as a result of the Coronavirus outbreak, with disrupted supply chains, limits on travel and cancelled events. We have already explored some of the employment law implications, but now turn our attention to the potential impact on your commercial contracts.
The starting point is that once a contract is concluded the obligations under it are absolute, i.e. any party affected by the Coronavirus outbreak is still required to comply with the contract. If they fail to do so then they may be in breach of contract and could face a damages claim or other sanctions.
However, there are two key exceptions to this general rule.
The first thing to check when you are concerned that you may not be able to perform your contractual obligations due to Coronavirus is whether the relevant contract or terms contains a force majeure clause. These clauses are sometimes referred to as “Act of God” clauses.
In basic terms a force majeure clause will seek to excuse one or both parties from performing the contract where certain events occur that are outside of their control. However, the contents and scope of these clauses vary considerably. To determine whether or not the outbreak, and its implications, are covered, requires an analysis of the actual clause and your specific circumstances.
However, some of the key factors to consider when reviewing such clauses are:
- Is the Coronavirus outbreak specifically covered as a force majeure event in the contract? This will be unlikely for older contracts, but this has become increasingly commonplace in the last few weeks.
- If the outbreak is not specifically covered, is it the type of event that would fall under the general force majeure wording in the contract?
- Does the contract exclude events that could have reasonably been provided against, avoided or overcome? If so, you need to assess whether actions could have been taken to avoid the impact of Coronavirus on performance.
- Does causation have to be established? Does the party seeking to rely on the clause have to establish that the force majeure event has actually prevented or hindered it from performance of the contract?
- Is there an obligation in the clause to mitigate the effects of the force majeure event? If so, have such steps been taken?
- Is there a requirement to notify the other party of reliance on force majeure within a certain time frame? If so, has this deadline been met?
- What are the consequences of establishing force majeure? In most contracts, this will excuse a party from performance or give them more time to perform. However, these rights may be limited or specified levels of compensation may still be payable.
- Is the clause impacted by any change in law? Some contracts may specifically provide for the impact of legislative changes by the relevant government.
So, if you don’t have a force majeure clause in your contract what’s the next thing to consider?
You will need to explore whether you or the other party can escape contractual obligations under the doctrine of frustration.
This provides that a party can be excused from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.
However, this is a very high bar and the courts have made it clear that the circumstances in which it will apply are rare.
Whether or not you can rely on frustration to avoid performance will be fact specific. However, the nature of the outbreak and the steps being taken by governments mean that it will clearly be triggered in some cases. For example, where the contract requires performance in a region or country that is subject to a government imposed lockdown rendering it impossible to perform the required services, then the doctrine of frustration may well apply.
If frustration were to apply then monies paid under the contract before it was discharged may be recovered, although the other party may be able to claim an allowance for certain expenses already incurred.
If you are entering into a new commercial contract or require advice on an existing contract then please do get in touch and I can introduce you to one of my colleagues who will be able to assist.
Unfortunately, the nature of these issues, mean that your options really do depend upon your circumstances and the precise terms of your existing contract, so generic advice is difficult to provide. There may also be a number of other points to consider not dealt with in the above article, such as whether any terms and conditions have been properly incorporated into the contract or there are other insurance issues.