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Coronavirus (COVID-19): Impact on Commercial Contracts

13/03/2020

The ongoing Coronavirus (COVID-19) contagion has led many businesses to consider whether they are able to seek relief from the performance of their contractual obligations. One common mechanism to seek relief in such a situation is through reliance on a force majeure clause.

Force majeure clauses

Force majeure clauses are commonly included in commercial contracts in case certain defined circumstances, typically outside a party’s control, prevents the performance by that party of their contractual obligations. Where such a clause applies the party in question is released of any liability for its failure to meet its obligations. Sometimes an extension of time is permitted and/or it may enable a party to terminate the contract if the force majeure event continues for a defined period of time.

Importantly, force majeure is not implied as a matter of law and express clauses are interpreted strictly: in light of the Coronavirus outbreak this week being labelled a pandemic by the World Health Organisation, businesses should be reviewing each of their contracts to identify whether or not the respective force majeure clauses cover business disruption caused by pandemic or crisis situations; or at the very least whether it is the type of event that would fall under general force majeure wording, as this will vary from one agreement to the next.

Force majeure and Coronavirus: are you covered?

The onus is on the party seeking to rely on force majeure to establish that the force majeure event has prevented, hindered, delayed or affected the performance of the contract. They are also under a duty to demonstrate that reasonable steps have been taken to mitigate or avoid the effects. Generally, force majeure clauses are not so generous as to offer relief where services or goods will simply be more expensive to perform or obtain.

If there is no force majeure clause, or the impact of COVID-19 falls outside its scope, the parties may need to consider whether the contract has terminated by operation of law on any other basis, such as the common law concept 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 it radically different. It sets a high bar which undoubtedly will be reached in some situations arising from COVID-19.

Frustrated contracts

If frustration applies, the consequences are set out in the Law Reform (Frustrated Contracts) Act 1943, which allows recovery of monies paid under the contract before it was discharged, subject to an allowance, at the court’s discretion, for expenses incurred by the other party.

Mitigating risk: Covid-19 and beyond

Given the current uncertainty and global reach of the outbreak, businesses should consider adding pandemics, epidemics and other crisis situations to their list of force majeure events. They should also consider amending their standard terms of business and reviewing their insurance policy wording carefully. It is key that business owners identify these issues early and take practical steps to mitigate the potential negative implications of the virus.

If you have any questions with regards to commercial contracts, force majeure or any other commercial implications of the Coronavirus, please contact Peter Rolph (Dispute Resolution) or Paula Eckton (Company & Commercial) on 01202 294 566 or email peterrolph@steeleraymond.co.uk or  paulaeckton@steeleraymond.co.uk

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