Coronavirus and contracts
Given the scope of the coronavirus pandemic, it is inevitable that some contracting parties will look to the outbreak to justify non-performance of contractual obligations, justifying their decisions by citing force majeure or frustration, writes Fox Williams’ Stephen Sidkin.
Force majeure is usually treated as meaning the occurrence of an event outside of the control of the parties that prevents a party from fulfilling a contract. It is a provision often found in commercial contracts.
But how it works will depend on: the terms of the force majeure clause itself; and the circumstances which it is said have resulted from the occurrence of the force majeure event.
In contrast, whilst the frustration of a contract is a recognised concept of English law, the English courts have repeatedly shown themselves reluctant to decide that a contract is frustrated. As such, it is inevitable that contracting parties focus more on force majeure rather than frustration.
The force majeure clause
War, strike and riot are often listed in a force majeure clause. Their meanings can be considered to be quite clear – equally, ‘act of God’, whether it be hurricane, flood or earthquake. But epidemic?
Whether or not the coronavirus will come within a force majeure clause will vary depending on the words used, the subject matter of the contract, and the event in question.
If the coronavirus does come within the force majeure clause, can it be said that the circumstances flowing from it justifies non-fulfilment of the particular contractual obligation?
For example, given the timeframe that has elapsed since the effects of the coronavirus became public, can it be said that an event is out of the control of the parties in circumstances where the parties could have taken steps to mitigate its effects by now? Could it be argued that a supplier should have already lined up an alternative source of supply, foreseeing that supply lines could be impacted by epidemics?
It is the case that an event of force majeure may be outside the control of the parties, whether or not it was unforeseeable.
Relying on force majeure to justify your own non-performance? A party considering relying on force majeure to justify non-performance should give thought as to how it will be possible to demonstrate that it is legally or physically impossible for it to perform its contractual obligations, and not simply unprofitable or more difficult to do so.
Is your counterparty looking to rely on force majeure? If a party is concerned that there is a risk that its counterparty may seek to rely on force majeure (for example, due to the location or industry that the parties are in) it may want to consider ways in which its counterparty can continue to operate. In doing so, it may make it difficult for the counterparty to demonstrate that its obligations under the contract have become impossible.
Usually, the force majeure clause will provide that the occurrence of a force majeure event suspends the performance of the contract for the duration of the force majeure event. It follows that it is possible to envisage, for example, that whilst an instalment of a production run might be affected, other production runs will not be.
As such, even if reliance can be placed upon the occurrence of a force majeure event, this may provide only temporary or limited relief to a party looking to exit the contract. However, it is also likely that the force majeure clause provides for a right to terminate the contract if the force majeure event continues past a certain period of time.
Whether it be a delay in goods being manufactured, travel plans disrupted, or the signing of a contract being delayed, the consequences of the coronavirus are likely to be with us for a lengthy time. As such, here are a few points to consider, now and in the coming weeks, in relation to the coronavirus, force majeure and your business:
* Check your contracts that you consider may be impacted by the coronavirus, so you can readily point to the rights and obligations under the contract if necessary.
Is there a force majeure clause in the contracts? If so, would coronavirus come within the definition of a force majeure event? Is there an obligation to give notice if a force majeure event occurs? Is there a maximum period of time during which obligations of the parties are suspended? Does this apply to both parties’ obligations or only the party whose actions under the contract are impacted by the coronavirus?
Is there a right to give notice to terminate the contract if the force majeure event continues for a certain period of time? Is this a right for both parties, or only the party that is no longer receiving the benefit of its counterparty’s performance under the contract?
* Check whether your contracts provide for certain payments to be made to you, or by you, if there is a breach of certain performance obligations. However, keep in mind the risk of such payments being categorised as unenforceable penalty payments under English law!
* If you receive a notice from your counterparty that it is seeking to rely on force majeure, or you give such notice, you should consider what steps you can take to mitigate your loss.
* If you and your counterparty are in agreement as to the coronavirus constituting a force majeure event, whilst this may offer you an opportunity to bring an unfavourable contract to an end ahead of schedule, be careful what you wish for.
Consider what your back-up plan is. Do you have another counterparty in mind that can step into the contract at short notice? Do you need to conduct an audit on your new counterparty – if so, how long will this take? And what onwards contractual obligations are you tied to that could be impacted by a change in your contractual relations?
Stephen Sidkin is head of commerce and technology at business law firm, Fox Williams LLP.