The outbreak of the coronavirus disease, COVID-19 continues to pose a significant threat to businesses in the UK. The impact on supply chains, transport and international travel is causing businesses to consider the impact of coronavirus on their current or future contractual agreements. Here Julie Hunter a commercial solicitor at Stephensons Solicitors LLP, discusses why it’s important for businesses to understand their legal rights and obligations in light of this global pandemic.
The outbreak of the coronavirus disease COVID-19 continues to cause severe disruption and uncertainty to global trade. Now categorised as a global pandemic by the World Health Organisation, businesses must consider whether the impact of the coronavirus could cause them to default on their contractual obligations, whether this may be an inability to supply goods due to the effect on the supply chain, an inability to provide services due to travel restrictions or the cancellation of planned public events due to quarantine. Many larger businesses have already started to issue statements to their customers and suppliers in advance of any potential disruption caused by the outbreak.
Can your business delay performance or fail to fulfil its obligations under a commercial contract due to the coronavirus outbreak without facing liability? The often-standard force majeure clause contained in commercial contracts may mitigate risks and help parties navigate the difficulties caused by the outbreak.
What is Force Majeure?
A force majeure clause may relieve a party from performing its obligations under a commercial contract due to the occurrence of events which are unforeseeable or outside of its control. You can only rely on a force majeure clause if it has been drafted into your contract. A force majeure clause cannot be implied.
As force majeure has no defined meaning in English law, the effect of a force majeure clause will depend upon the way it has been drafted into each individual contract. Typically, force majeure clauses can cover:
- acts of God, such as natural disasters and extreme weather events
- terrorist attacks, civil war and breaking off diplomatic relations
- compliance with a law or order, rule or direction of the government
- epidemics or pandemics
Your force majeure clause may give you the right to suspend performance of the contract for a certain period of time or allow either you or your counterparty to terminate the contract entirely on the occurrence of a force majeure event.
COVID-19 as a Force Majeure
On 11 March 2020, the World Health Organisation classified the coronavirus as a global pandemic. If your force majeure clause covers the occurrence of a pandemic, then the coronavirus outbreak is likely to constitute a force majeure event.
If your force majeure clause does not cover pandemics, you must carefully consider whether the outbreak or its effects could fall into any of the other force majeure events specified in your contract. For example, you may find it possible to argue that the quarantine or isolation restrictions effecting your supply chain constitute a ‘work stoppage’, or that any international travel restrictions imposed in the UK and other countries which restrict performance could constitute ‘compliance with an order of a government’.
The court often interprets the precise wording of force majeure clauses strictly. If the situation is unclear, you should seek specialist legal advice on whether the coronavirus would constitute a force majeure event under your contract.
Invoking the clause
Even if the coronavirus qualifies as a force majeure event under your contract, you may not necessarily be able to invoke your rights under the force majeure clause.
Most force majeure clauses require you to demonstrate that the event itself has prevented performance of your contract. This means that if the coronavirus outbreak is simply causing performance to be more difficult, costly or time-consuming for your business, this may not necessarily be enough to invoke the clause.
Additionally, it may not always be desirable to invoke your force majeure clause for commercial reasons. You may need to consider the following matters:
- Is the force majeure clause / event open to interpretation? Your counterparty may dispute your entitlement to any force majeure remedies and seek to enforce performance of the contract.
- Could your insurance policy cover any losses or business interruption instead?
- Will other parties / business be facing similar problems with supply or performance? Could you negotiate new terms to navigate the issues?
- Would exercising the force majeure clause damage your ongoing relationship with the counterparty? Is there a reputational risk if the matter became public?
Breach of contract
It is possible that the effects of the outbreak on your business may not be covered by the force majeure clause as drafted or you may not have the option of relying on a force majeure contract at all.
If this is the case, any failure to perform your obligations under the contract (even if the failure is attributable to the coronavirus) may constitute a breach of contract which you could be liable to the counterparty for. However, there may be other mechanisms in the contract or under English contract law generally which may assist you and it is imperative to obtain legal advice should you find yourself in this situation.
Seeking a legal specialist
If you are currently considering entering into new contracts or are reviewing your contracts in light of the coronavirus, you should seek legal advice on strengthening your force majeure clause.
If you are currently facing threats of litigation over failed performance caused by the coronavirus or are considering invoking your force majeure clause, it is important to seek legal advice from an insurance litigation specialist on your rights of termination and breach of contract.