Coronavirus : Tips for managing your contracts
Updated: Apr 24, 2020
If you have an ongoing contract you are required to perform your obligations under the contract and will be in breach of contract if you fail to do so.
There are two main exceptions to this rule:
1. Where you have a Force Majeure clause in your contract which covers the coronavirus epidemic whether specifically or relatedly.
2. The common law doctrine of Frustration.
A force majeure clause safeguards a business if it is unable to perform its contractual obligations as a result of an event outside of its control.
As a business you need to evaluate the risk of your suppliers claiming force majeure protection. Suppliers also need to establish whether they will be able to rely on force majeure clauses if they are unable to supply their customers as a result of coronavirus.
In view of the impact of the Coronavirus outbreak you may wish to rely on force majeure clauses or other contractual rights to get relief from the performance of certain obligations in your existing contracts.
What you must do : First check your contract. Do you have an express force majeure clause in the contract.
· Review any commercial contracts you have to consider whether there is a Force Majeure clause on which you can rely.
· Check for wording talking about events beyond a party’s reasonable control, or specifically referring to epidemics, pandemics, government action or anything similar.
· If there is such a clause, take legal advice on whether you can rely on the clause or whether the other party to the contract can use the clause against you to enforce any obligations that you have under the contract.
I have an express Force majeure clause in my contract. What does this mean?
A Force majeure clause is usually included in commercial contracts in case certain events occur to prevent performance of the parties’ contractual obligations. The purpose of the clause is to set out steps that the parties should take to suspend, adapt or terminate the contract if supervening events occur to make performance of the contract impossible or not possible at a particular time. The term force majeure means "superior force” and may cover events defined as "acts of god" (such as hurricanes, lightning, earthquakes or tsunamis) and certain disruptive and unforeseeable acts such as riots, industrial action.
If one of the events contained in a force majeure clause happens, the clause will usually state the steps the parties must take eg the party wishing to rely on the force majeure clause may have to inform the other party within a certain period (ie notice period) and take all reasonable steps to mitigate (i.e. reduce) the effect of the event that has affected its ability to perform the contract. Dependent on the wording of the contract this may be followed by a suspension of the contract, a variation of the contract or a termination of the contract.
Does the force majeure clause in my contract apply to the Coronavirus outbreak?
As the coronavirus is a relatively new virus it is highly unlikely that any force majeure clause in most contracts drawn up before the pandemic would have a clause covering a coronavirus outbreak. In the absence of any specific reference to coronaviruses, if you wish to rely on your force majeure clause you will have to show that the coronavirus pandemic is the type of event that would fall under any of the other event headings in the clause eg epidemic or that there has been government legislation or action or administrative action preventing performance of the contract eg work stoppages.
The party who wishes to rely on the clause will need to show that the force majeure event that it is relying on is beyond its “reasonable control” and was not in the parties “reasonable contemplation” at the time that they were entering into the contract.
I wish to seek relief for force majeure.
If you are the party wishing to rely on the force majeure clause you need to prove that the force majeure event has delayed, affected, hindered or prevented your performance of the contract.
The standard procedure if a force majeure event occurs is for the parties to agree to suspend the performance of certain obligations within the contract for a defined period (in this case possibly until the coronavirus pandemic has ended or when its impact on the parties contract ends eg a restoration of the supply chain. The parties also have the option of terminating the contract immediately or of terminating the contract after force majeure event has been in place for a set period of time eg 3 months.
It all depends on the interpretation of the force majeure clause. You need to drill down to the cause of the delay. Is the cause of the delay the event in question (eg in this case the coronavirus pandemic) or is it legislation passed by for eg the Government intended to reduce the impact of the event(eg the Coronavirus legislation). You then have to show which of these is within the scope of your force majeure clause.
I do not have a force majeure clause in my contract.
In the absence of a force majeure clause in your contract or if the coronavirus contract is not covered in your contract you may need to consider whether you can terminate the contract on the ground that it has been terminated by operation of law eg the other party has accepted your renunciation or repudiation of the contract or the contract has been frustrated ie the doctrine of Frustration.
The Frustration doctrine provides that a party to a contract is discharged from fulfilling its obligations under a contract if a change in circumstances makes it commercially or physically impossible to perform the contract or if the change in circumstances would make performance of the contract fundamentally or radically different from what was in the parties’ contemplation at the time they entered into the contract.
The doctrine of frustration is rarely successful in court as it is difficult to prove. This is because the courts usually require the party seeking to rely on ”frustration of the contract” to prove that it is “impossible to perform”. It will therefore be:
What steps can I take to mitigate my risk?
Given the seriousness of the pandemic and its global scope we recommend that you
· Review your existing contracts and consider which of them may be affected by delays, supply chain disruption or suspension or termination by the other party to the contract.
· Seek legal advice if in doubt about whether a force majeure event applies to a specific contract.
· Contact your customers and suppliers to discuss the impact of the pandemic and steps that you can take to prepare for any disruptions.
· Be proactive – consider how you can mitigate the risks evidenced by this pandemic in future contracts. When drafting a force majeure clause for a new contract you should include pandemics, epidemics and other serious crisis events to your list of force majeure events.
· You should also consider amending your standard terms and conditions of business to ensure that your force majeure clause covers pandemic events and other crises.
If you require advice on the current Coronavirus situation and how this will impact you and your business, please contact us. We are specialist Contract Solicitors based in Bedford and operate nationally.
If you would like to talk through the consequences for you, call our Coronavirus Helpline on 01234 938089 or e-mail us at firstname.lastname@example.org and one of our Helpline team member will be in touch.