The Financial Times has reported that the Covid-19 outbreak has now impacted industries across the world due to disrupted supply chains, a squeeze on consumers and limitations on how and where people work. Chinese factory closures have hit the global tech and auto sectors. Conference and other large gathering cancellations are affecting the events industry.
Since its outbreak, speculation has also been rife that we might see an increased number of contracting parties seeking to rely on force majeure clauses – particularly in supply contracts where holes in a workforce owing to travel restrictions and self-isolation would have a marked effect. With the WHO announcing that the world must be prepared for a pandemic, and considering the already witnessed effect on global business and attempts by some buyers in supply chains to declare force majeure in their contracts, the impact of Coronavirus on commercial contracts could be substantial. We consider some of the effects below.
Where a significant change of circumstances renders performance of a contract impossible, illegal or radically different from that contemplated by the parties at the time of the contract in circumstances entirely beyond the remit of the parties, the English law doctrine of frustration may apply. When such an event occurs, the parties are excused from further performance and the contract will be permanently frustrated i.e. terminated. Due to the rigidity of the remedy and the fact that courts are reluctant to find that a contract has been frustrated, the remedy is limited. If the contract includes express provisions addressing the event (including a force majeure clause), this will normally prevent the contract being frustrated. For these reasons, force majeure clauses are typically used in international supply contracts and may be more relevant.
A force majeure clause is included in a contract to protect one or both parties from being held to performance obligations which are affected by events outside its control. Force majeure does not automatically apply and there is no legal definition, so the parties can only rely on it where it is specifically included in a contract and the events fall within the contractual definition.
Typically, a list of events is drafted into the contract which constitute a force majeure event, which may include terrorism, war, disease and pandemics. If COVID-19 is declared a pandemic then clearly it would fall within this category. But what if it is not? And what if the disease is not covered in the list of force majeure events? Parties may still seek to rely on the more general phrasing "events outside the control of the parties".
Any party seeking to rely on a force majeure clause must prove both that the virus falls within the clause (as above) and that (depending on how the clause is worded) the virus has caused a failure to perform. The specific wording of the clause must be carefully considered – for example, if the clause is drafted to say that the relevant triggering event must "prevent" performance, as opposed to merely "hinder" or "delay" performance, the party seeking to rely on the clause must prove that performance is legally or physically impossible. Businesses should also take care that certain events are not carved out of the clause.
Depending on the way a force majeure clause is drafted, the consequences for a party could be suspension of its obligations or an extension of the period of time in which to perform its obligations, exclusion from its liabilities for non-performance or delay, or for prolonged events, termination of the contract. However, it is common for the clause to provide that only the "innocent" party (not the non-performing party) has the right to terminate, so this may be of limited use to the party affected by the force majeure.
Other issues to consider are potential attempts by suppliers to renegotiate terms due to Coronavirus' impact such as price adjustment, limitation or exclusion of liability, or insertion of a material adverse change clause.
Businesses should review their key contracts to determine both whether a force majeure clause covering the Coronavirus outbreak is present, what rights it gives to each party, and whether any action needs to be taken – for example, there are often notification requirements which must be adhered to if a party plans to rely on a force majeure clause.
If you would like one of our commercial contracts specialists to advise on any of the issues raised in this post, please contact any of the following individuals on the details below: