Coronavirus: the impact on contracts

16 March 2020 

We’re already being asked to help our clients deal with the repercussions of the global spread of the novel Coronavirus – cancelled events, delayed services and deliveries, failure to pay invoices – and with the expected ‘peak’ of UK cases to come in the next few weeks, the worry that large numbers of employees will not be able to work. Additionally, home working is likely to become compulsory where possible, and needs to be managed properly and effectively.

Failure to meet contractual obligations – yours and theirs

With the current turmoil, at some point in the near future either you are not going to be able to meet one or more of your obligations, or someone is going to fail to meet one of their obligations to you. And of course, this can have a knock-on effect – someone fails to pay you, so you can’t pay someone else, be that a supplier or your employees.

So, when this happens, what should you do?

Check the contract

First, you need to check the agreement for a ‘Force Majeure’ clause, which gives one or both parties additional time to complete their obligations if unforeseeable events which are completely outside their control prevent them from doing so. It’s important to note that a Force Majeure clause will usually not allow a party to escape their obligations completely, but only for a limited period of time, until the Force Majeure event has passed.

Not every contract will have one, and not every Force Majeure clause will offer a solution. But if you do find a Force Majeure in the contract, here’s what you need to check:

1. Does Coronavirus fall within the scope of the clause?

A Force Majeure clause will contain a list of qualifying events. Sometimes this will be exhaustive, and list everything that is covered – in relation to Coronavirus, you need to check for ‘infectious disease’, ‘epidemic’, ‘pandemic’ or similar wording. However, there may instead be a broader, non-specific definition. It will almost always be a matter of interpretation in either case – if you’re not sure of the scope of the clause, you should seek legal advice before acting.

2. What is the effect of the clause?

If you think Coronavirus falls within the scope of the clause, you need to work out the actual effect of the Force Majeure clause. Most Force Majeure clauses will allow for a delay in a party meeting some or all of their obligations – but this may only be for a certain period, and it may not apply to specific and important obligations, such as a customer paying for goods or services on time. Additionally, some Force Majeure clauses give the party to whom the obligation is owed the option to terminate the agreement if the Force Majeure event continues for a certain period of time.

3. What do you need to do?

If you are the party trying to rely on the Force Majeure clause, you will need to check procedures you need to follow – you may need to give notice to the other party that you are seeking to rely on the clause, and there may be a time limit on this. Any notice will also need to conform strictly to the requirements in any ‘notice’ clause in the agreement, otherwise any attempt to rely on the Force Majeure clause may be unsuccessful.

Of course, if you’re on other side of the Force Majeure claim, you’ll want to check to confirm that the other party has met their notice and time requirements, especially if you want to prevent them from taking advantage of the Force Majeure clause.

What if there’s no Force Majeure clause?

If there’s no Force Majeure clause, another option is to rely on a legal principle called ‘frustration’. Where the circumstances of the performance of a contract have changed so significantly that it is either impossible to perform the contract, or that performance would be radically different from what the original intent of the parties was, then it may be possible to consider the contract frustrated. A frustrated contract is automatically terminated, and the parties are under no further obligations.

Frustration is a difficult and complicated principle to rely on, however, and any attempt to use it is likely to be strongly resisted by the other party. If you think frustration is a possible option, seek legal advice.

Take action and communicate

If there’s a Force Majeure clause, and you’re confident it applies to the circumstances, then comply with it – whichever side of the obligation you’re on. Failing to allow the other party to rely on a Force Majeure clause may be a breach of contract. If you’re not sure of the applicability of the Force Majeure clause, then seek legal advice as soon as possible.

If there’s no Force Majeure clause, and you really can’t meet an obligation due to the Coronavirus, the first thing you should do is communicate with the other side. Let them know and explain the situation. This is also a good time to seek legal advice, especially if the liability is considerable – frustration of the contract may be an option, but it’s also worth looking at all the circumstances of the agreement, to see if you have any other useful rights, such as any termination options which may have been triggered.

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