Coronavirus (Covid-19) and Commercial Contracts: Unable to perform contractual obligations? Force majeure clauses, frustration or variation could help
The outbreak of coronavirus (Covid-19) in China at the end of 2019 has escalated into a global health pandemic disrupting supply chains, business operations and workforces around the world. Countries are taking drastic action to try to contain or delay the spread of the virus including closing their borders, mandating quarantines and temporarily shutting down non-essential businesses including restaurants, cafes, bars and theatres.
In this challenging time, it is important for businesses to review their commercial contracts to check whether they are able to perform their contractual obligations and to put in place measures to minimise business disruption insofar as is possible.
Many businesses will struggle to perform their contractual obligations in commercial contracts due to the coronavirus pandemic. In this briefing we will consider how force majeure clauses, the law of frustration and contract variation could help protect your business.
Force majeure clause
Force majeure clauses in contracts governed by English law excuse parties from being liable for delays or failures to perform contractual obligations if they are caused by force majeure events. Force majeure events are generally defined as any circumstance beyond a party’s reasonable control and specific events may be included in the definition.
The right to rely on a force majeure clause and the contractual effect of a force majeure event will depend on how the force majeure clause is drafted. Here are some points that you should consider:
- Does the written contract apply? Often two businesses enter into a contract with each other before either of them sends out their standard terms. If a party wishes to rely on a term in a contract (or avoid it altogether) it is worth checking how and when the terms were introduced.
- Is the contract governed by English law? If the contract is governed by English law, a party can only rely on a force majeure event if a force majeure clause is expressly provided in the contract. This is because force majeure is not defined in English law. In contrast, in some other jurisdictions, contracts may be subject to statutory definitions of force majeure.
- Is there a force majeure clause in the contract? If not, consider whether the contract is frustrated (see below).
- Is epidemic or pandemic listed in the definition of a force majeure event? If epidemic or pandemic is not listed, you may be able to rely on a force majeure clause if it does not list specific events or if it lists events as being non-exhaustive.
- Which party or parties can rely on the force majeure clause? Check whether the force majeure clause is drafted such that you are eligible to rely on it.
- Is performance prevented, hindered or delayed? Check whether the force majeure clause requires the force majeure event to prevent performance or simply hinder or delay it. If the clause requires performance to be prevented, in order to rely on the clause, you will need to show that the coronavirus pandemic has made it legally or physically impossible for you to perform a contractual obligation. If the clause only requires performance to be hindered or delayed, in order to rely on the clause, you will only need to show that the coronavirus pandemic has made compliance with a contractual obligation substantially more onerous. Please note that an increase in the cost of performance may not be sufficient for those purposes.
- What is the contractual effect of a force majeure event? Check what the force majeure clause states will happen on a force majeure event. If the coronavirus pandemic does amount to a force majeure event as defined in a contract, depending on how the clause is drafted, you might be: a) excused from liability for failure or delay in performing your contractual obligations, b) given an extension of time to perform those obligations and c) able to renegotiate terms.
- Any notice requirements? Does that clause require the party seeking to rely on it to provide notice to the other party within a particular time frame?
- Mitigation? Even if the clause does not provide an express duty to mitigate, you will be under an implied duty to take all reasonable steps to mitigate the effect of the coronavirus pandemic on your ability to perform your contractual obligations.
- Business Continuity Plan? Does the contract include a business continuity clause? If it does, it may specify steps that you need to carry out after a force majeure event.
The common law doctrine of frustration excuses parties from further performance of a contract if circumstances arise which render further performance physically or legally impossible, or to be radically different from how it was contemplated when the contract was agreed. The contractual effect of a frustrating event is that the frustrated contract terminates automatically and the parties are no longer bound to perform their obligations.
It is possible that the effects of the coronavirus pandemic could cause a contract to be frustrated and parties to be discharged from contractual performance. However, please note that a contract is unlikely to be frustrated by the coronavirus pandemic in the following circumstances:-
- If the consequences of a pandemic have been expressly provided in the contract (such as in a force majeure clause);
- If the coronavirus pandemic has rendered contractual performance more expensive (but not commercially impossible);
- If the coronavirus pandemic has rendered contractual performance more difficult (but neither impossible nor radically different from what was contemplated when the contract was agreed);
- If an alternative method of contractual performance is available;
- If you are selling goods and have been let down by your supplier.
Variations to contracts
If you cannot rely on force majeure or frustration, all may not be lost. In today’s business climate you may well be able to negotiate favourable variations to contracts which offer the other party “a bird in the hand”. If you successfully negotiate a variation and want advice on how to ensure it is binding on the other party after the current fears have subsided, we can advise you on the letters to send or variations agreements to sign to obtain a binding variation.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.