Coronavirus: Impacts on commercial contracts; is force majeure applicable?

An unprecedented time

Since the coronavirus was officially declared as a pandemic earlier this month, many people have been left uncertain of what the future may hold. While following government guidelines to slow the spread of the virus remains the number one focus for almost everyone, financial stability is also a real concern and will rank highly on the priority list for many.

Due to the virus, many commercial businesses have been left with potential financial concerns and will be looking to reduce expenditure via all outlets possible. As such, many will be wondering if there is the potential to get out of any existing contracts or continue to enforce performance of their contracts.

Under English law, contracts that require ongoing performance are in principle absolute, meaning that both parties must fulfil their part of the contract – if they fail to do so, they will be considered as being in breach of contract. However, there are some exceptions to this, the most common two being; (1) whether the contract has a force majeure clause and (2) the common law concept of frustration.

What is a force majeure clause?

Force Majeure clauses typically excuse one or both parties from performance (or fulfilment) of the contract, if there’s been an event or certain incidents which is beyond the control of either party.

These can include events such as:

• Natural disasters
• Outbreaks of war
• Strikes
• Epidemics
• Acts of God
• Pandemics

The underlying principle is that, should one of the events listed above happen, the party providing a service is excused from, or entitled to suspend performance of all or some part of its obligations, under the contract, without being liable for its failure to perform the obligations. In simpler terms, under these circumstances, if the party is unable to fulfil the contract, they will not be in breach of it.

However, in the current situation, it is important to note that if a force majeure clause does not specifically include pandemics there may still be an argument that, ‘events beyond a party’s control’ or ‘acts of God’, could be enough to trigger a force majeure. How these clauses work is very much dependent on how they are drafted.

Is COVID-19 enough to trigger a force majeure clause?

For a supplier to rely on the clause, there must be a link between the outbreak of COVID-19 and its consequences to their inability to deliver what is detailed in the contract. The pandemic cannot be used to get out of a contract which a party does not want to perform or because performance may be unprofitable. Parties will also need to show that they have taken steps to mitigate the effect of the event on their contractual performance.

In cases where a contract does not contain a force majeure clause, the common law doctrine of frustration may apply in certain circumstances where performance has become impossible. Although courts rarely apply this doctrine, we may see this being applied more due to the current pandemic.

This doctrine discharges a party from their contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or where performance would be drastically different.

Practical steps to take during this time

Here are some actions companies should be taking in the face of COVID-19;

1. Reviewing all contracts where a force majeure clause may be enforceable
2. Seeing if the contract defines a force majeure event and if it will cover the pandemic
3. Considering time limits if the clause is to be invoked
4. Looking into alternative ways of performing the contract
5. Identifying reasonable steps that need to be taken to mitigate losses
6. Retaining all evidence of any disruption or delay
7. If entering into new contracts, considering explicit Coronavirus clauses that sufficiently cover all eventualities
8. Seeing whether insurance will cover losses arising from the pandemic and whether they need notifying.

At such a turbulent, challenging and scary time, the best thing to arm yourself with are the facts. Understanding where you and your business stand can be a real comfort in circumstances such as these, and the team at Primas are happy to offer advice.