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Coronavirus: The Impact on Commercial Contracts

With the global outbreak and rapid spread of Coronavirus, Governments and businesses around the world are endorsing preventative measures to contain and delay the spread of the infection, including closing schools and businesses and restricting travel. While these measures are, of course, being taken in the interests of health and well-being, there will inevitably be economic and commercial impacts on businesses – particularly in relation to contractual relationships.

Businesses are likely to experience delays in the delivery of goods and services and an overall disruption in their commercial arrangements.  It is therefore highly advisable that businesses consider the consequences that may follow as a result of contractual obligations not being fulfilled.   

Dan Dowen, Commercial Contracts Associate Solicitor, looks at the essential points for businesses to consider when reviewing their commercial contracts in view of the Coronavirus epidemic.

Force Majeure

First, consider whether the contract contains a force majeure clause. Most contracts will contain this clause, which essentially relieves a party from its contractual obligations in the event of the occurrence of circumstances beyond its control.

A force majeure clause will often have the effect of terminating the contract or delaying its performance, providing that conditions of the clause and the definition of a ‘force-majeure event’ are satisfied.

A force majeure event is often described as, among other potential circumstances, ‘acts of God’, an ‘epidemic or pandemic’ or may simply refer to ‘any other cause beyond the party’s control’. Where the clause specifically refers to an epidemic or pandemic, it is likely that Coronavirus could trigger this clause as the infection has officially been deemed as pandemic by the World Health Organisation.  However, where the clause is more general in its wording, it may give rise to greater uncertainty.

In any event, the party seeking to rely on such a clause will need to demonstrate that the force majeure event has caused that party’s failure to perform its contractual obligations and the party has taken all reasonable steps to minimise or prevent the effects of the force majeure event.

It will also be important to note the other provisions of the contract for notice requirements and any further outlined steps that must be taken under the terms of the contract if seeking to rely on a force majeure clause.

Frustration

In the absence of a force majeure clause, the common law doctrine of ‘frustration’ may apply, which allows the parties to a contract to cease performing its contractual obligations where it becomes impossible to do so in circumstances beyond the control of the parties.

The doctrine of frustration is more difficult to establish. The party seeking to rely on frustration will need to prove that the frustrating event is beyond what was contemplated by the parties when they entered into the contract, not due to the fault of either party and has made it impossible to perform the contract in the way that was intended at the time the contract was entered into.

If such doctrine applies, the contract will be terminated automatically. However, it has a more limited application than a force majeure clause as the parties may be still be liable for the consequences of non-performance of the contract, up to the point of frustration.

Further considerations

Businesses should also:

  • consider its insurance coverage to determine whether the current policies provide for losses incurred as a result of the disruption caused by Coronavirus;
  • review its business continuity and disaster recovery policies to ensure that they incorporate strategies to manage the obstacles and challenges posed by Coronavirus; and
  • ensure that it is evaluating and reviewing its contracts and the rights and obligations under these contracts in order to appropriately manage any risks and take control of its trading relationships. This will be imperative in avoiding litigation risks and mitigating any potential losses that the business could face.

With the increasing importance of addressing this matter, the appropriately legal advice should be sought when undertaking these reviews.

For further information or assistance, please contact Dan Dowen on ddowen@berrysmith.com or alternatively call 02920 345 511 and ask for the Commercial team.