With the outbreak of the coronavirus (COVID-19) becoming increasingly more widespread within the UK, many local and multinational businesses are facing growing concerns over the impact that the epidemic will have on the future of their business.
It is clear that the performance under many commercial contracts will be delayed, interrupted, re-negotiated or even cancelled. Reasons for this will vary and will include the inability to source the raw manufacturing materials, the restrictions being place on transportation and the shortage in physical labour due to quarantine measures that are being imposed.
But will the impact of the coronavirus allow a contracting party to deviate from the existing contract and agreed delivery terms? What are the party’s rights, obligations and remedies against each other?
The contractual position
English law contracts that require ongoing performance, are in principle, absolute i.e. the performing party is required to perform its obligations, irrespective of the impact of Covid-19, and will potentially be liable to the other party for failure to do so.
There are however two exceptions to this rule:
- The operation of a force majeure clause; and
- The common law concept of frustration.
A force majeure clause deals with what happens in the event that a business, due to circumstances outside of its control, is unable to perform its obligations under a contract. The first step if therefore to review your contracts, to identify if they contain such a clause. If they do, the particular clause will need to be considered, to identify whether they cover the failure to perform, due to the outbreak of Covid-19. Every clause will be drafted differently, however the key points to consider are:
- Does the clause specifically cover the Covid-19 epidemic? Even if it does, there may be other requirements that have to be satisfied;
- If it is not specifically covered, does it fall within the general force majeure wording?
- Does the contract exclude events that could have reasonably been provided against, avoided or overcome?
- Does causation have to be established? Usually, if you are wanting to rely on a force majeure clause, then you must establish that the event had prevented or hindered your performance of the contract. Some clauses are drafted in a way that requires the non-performing party to prove that performance was rendered impossible, which is an extremely high burden.
- The party claiming force majeure is usually under a duty to show that it has taken reasonable steps to mitigate or avoid the effects of the force-majeure event.
- Does the clause contain any notice requirements that need to be adhered to?
If a force majeure clause can be relied upon then the remedies that will be available will depend on the specific drafting of the contract in question. Standard clauses tend to:
- suspend the obligations affected by the force majeure event, whilst the force majeure event is ongoing, with reactivation of obligations on conclusion of the force majeure event;
- allow for either party to terminate the contract, if a suspension is ongoing for a certain period;
- allow a liability free period for the parties, in relation to their failure to perform the affected obligations under the contract; and/or
- require the parties to mitigate the impacts of the force majeure event.
Commonly, parties will bear their own costs arising from any force majeure delay, however there are exceptions where compensation may be payable after a certain duration. If parties do not wish for the right of termination to be invoked, then it is important to engage in discussions sooner rather than later. It may also be preferable for these to be held on a without prejudice basis.
In the absence of a force majeure clause, parties may be able to rely on the common law doctrine of frustration. This provides that a party is discharged 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. In respect of the outbreak of Covid-19, such a test will obviously be met in certain circumstances i.e. if the contract requires performance in a region that is subject to a state-imposed lockdown. However, in many other circumstances, parties will have to rely on an expressly drafted force majeure clause in a written agreement.
If frustration does apply, then the contract is automatically discharged, which may not be a desirable outcome if the parties are wanting the service to resume in the future.
We would advise that you consider:
1. taking the time to review your contracts to identify the force majeure clauses. Seek advice on whether you can rely on it or any other express provisions in the agreement.
2. Check to see if your force majeure clauses contain any limitations or timelines that have to be adhered to
3. If you are entering into new contracts, seek advice on how best to draft provisions covering all eventualities
4. Review your business insurance policies to see if your business interruption policy covers Covid-19.
For more information on the issues raised in this article or if you would like assistance in reviewing your contracts, then please contact a member of our corporate and commercial team on 01524 548494 or 01228 552600.