As the country prepares to deal with “the worst public health crisis for a generation”, it is clear that the recently declared COVID-19 pandemic is starting to make it difficult for businesses to fulfil their contractual obligations bringing potentially significant disruption to supply chains in all sectors.
We take a look at the questions being asked by our clients and the legal and practical steps that businesses can take at this challenging time.
What could happen if…
A contract cannot be carried out because of COVID-19?
You may have heard of the term ‘force majeure’, which is a clause usually included in an agreement and which gives the parties, in specific circumstances, the right to suspend, delay performance or cancel a contract as a result of an event beyond their reasonable control.
However a force majeure clause will only cover specific circumstances; for example, a typical clause will include a suspension or cancellation for outbreak of civil war, terrorism, riots, extreme adverse weather and strikes and may not specifically include a suspension of the terms for the unavailability of labour force or materials because of a pandemic.
There is no specific definition of ‘force majeure’ as a principal in English law and so it depends on what the contract explicitly provides. Force majeure cannot be ‘implied’ into a contract (thus the parties cannot argue that it was in the contemplation of both parties when they entered into the contract that the contract could be suspended or cancelled in specific circumstances).
If this is the case, it is unlikely that either party could unilaterally decide to suspend the performance of the contract, without consent of the other side and could mean that if you do not perform your obligations you are in breach of contract.
If you do have a force majeure provision in your contract, then you would need to check that the clause specifically covers epidemic or pandemic outbreaks as a trigger event, or that it is drafted widely enough to allow you to take action. Some clauses include ‘acts of government’ which may include decisions made by the UK government to limit trade and restrict movement of individuals.
What remedy is available to you will depend on the way your specific contract has been drafted; typically some clauses allow for extension of time and suspension until the triggering event is over, but others allow for termination of the contract.
If you do not have a force majeure clause in your contract, the doctrine of frustration of the contract (in the law of England and Wales) may help if the event is triggered after a contract is entered into.
In order for the doctrine to be effective and applicable in the current situation, COVID-19 and the effect of the virus outbreak must have made it impossible for the performance of the contract to be delivered by one party or both, or the obligations under contract have become something radically different from that which was envisaged.
This is a very high bar and in the current circumstances, until specific steps are taken by the UK government to limit activities, we have yet to reach that point. This is despite the fact that many event organisers are currently making on-the-ground decisions to cancel sports and business events.
Frustration of a contract cannot be relied on by a party just because it will become more difficult or expensive to perform, it must be unlawful or impossible for them to carry out their obligations. For example, if a distributor has contracted to supply widgets to a retailer, but that distributor’s usual supply is unavailable from its usual source in Country A, if it can source the supply from Country B, albeit at a higher price then the doctrine of frustration cannot assist as the contract could still be performed, although at a disadvantage to the distributor. If the government made it unlawful to receive imports of widgets, then the contract would be frustrated.
The effect of a contract being frustrated is that the contract will be terminated and both parties released from any further performance. However, each party may be able to recover monies paid or excused liability to pay under the contract terms.
What if an event is cancelled?
The situation is slightly more fluid for events. At the moment, it looks increasingly likely that the government could impose restrictions on how events are run and the numbers of people who are able to attend.
Once the government makes a decision, as they have in Italy to restrict such events, then a contract relating to supply of goods and services could, more easily become frustrated.
Will the position change?
It could be that as the current situation is so unusual that public policy could change. This could mean a change in court’s approach to contractual frustration on the basis of unintentional breaching of contract resulting from the effects of COVID-19 outbreak.
How can we help?
- Review the wording of your contract. Consider asking to vary current contracts to include a provision for a force majeure clause, so that you and your contracting partners have contingencies in place to deal with trigger events.
- Think about your supply chain as a whole and consider contingency planning in case elements of that supply chain are unable to deliver; keep a watching brief on the world news so that you can anticipate any changes to the supply chain and create contingencies to cover any gaps which may need cover.
- Check your current business insurance and check for wording which relates to business continuity insurance and the scope of the same.