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The coronavirus (‘Covid-19’) outbreak is a constantly evolving situation. What is becoming clear is that it will have a very significant impact on trade at international and local levels all the way down the supply chain. Many businesses are now waking up to the realisation that their operations might be impacted and are starting to make preparations. So, what is the legal position if there are delays in performing a contract due to factors beyond the control of the parties involved?
Under the English common law, parties have limited general protections when a contract becomes impossible to perform. Those protections generally have to be specifically built into the contract through what is known as a force majeure clause (meaning “superior force”).
A force majeure clause will operate to defer the performance obligations of one or both parties to a contract in the event of specified events which are outside their control until that event has ceased to prevent performance. In some cases, the suspension of obligations beyond a certain period of time can lead to the right to terminate the contract without penalty or with limited penalties. If you do have such a clause in a contract and you might need to rely on it due to the impact of the coronavirus outbreak, the first question is whether the outbreak is or might become covered by the defined force majeure events. Very few, if any, contracts will have specifically anticipated the coronavirus and the specified events that might be relied upon are likely to be more general in nature such as acts of God, natural disasters, epidemics or pandemics or acts taken by governments. The point at which the outbreak might become a force majeure event will depend upon the terms of the contract – is it the fact of the outbreak eg illness and quarantine or the secondary consequences of it eg travel restrictions? Is the necessity for voluntary quarantine sufficient at one end of the spectrum through to closed borders or WHO travel bans at the other end of the spectrum?
It is necessary then to check and, if appropriate, comply with the notice requirements of the force majeure clause. Most contracts require notice to be given to the other party within a certain period after the intervening event has first occurred.
If there is no force majeure clause, it may be possible (under English law) to argue that the outbreak has frustrated the performance of the contract. The doctrine of frustration requires an unexpected event that is beyond the control of the parties and which renders performance of the contract physically or commercially impossible. It is a principle that is very rarely applied because the contracting parties are generally assumed to have apportionment or shared risks between them and therefore that commercial contracting parties will have agreed specific arrangements by way of an appropriate force majeure clause. There are specific factors that the Courts would consider in determining whether a contract is frustrated and these will vary according to (a) the terms of each contract, (b) the factual background and (c) the knowledge and expectations about risk when entering into the contract. There is certainly an argument to say that the outbreak of epidemics is not in itself an unforeseeable event.
It is important also to note that you if you are dealing with Chinese companies the situation will be not only more immediate (at least at these relatively early stages) but it is a more complex situation because of Chinese central government involvement in foreign trade and specific specialist advice is likely to be required.
It is also important to bear in mind that making an incorrect assertion of either the right to rely upon a force majeure clause or frustration can itself carry adverse consequences. Firstly, there will be the wasted legal costs of a dispute, possibly litigated in the Courts. Secondly, it can cause reputational damage as it is a serious step to take in a commercial relationship. Thirdly, it could entitle the counterparty to the contract to treat the contract as being repudiated and to terminate the contract and/or claim damages.
So, what steps should businesses be taking now?
The situation is likely to continue for some time and is almost certainly going to get worse before it gets better. Businesses that might be affected should now:
- Review contracts in which force majeure clauses might have been included (whether they might be used by or against you);
- Consider carefully the circumstances in which the force majeure clause might apply and the notice requirements for invoking it;
- Consider whether the force majeure clause will operate to suspend performance only for a fixed period (for example until the travel restrictions or quarantine requirements have been lifted) or whether it will entitle either party to terminate the contract;
- Consider if there are alternative ways of performing contractual obligations (for example seeking alternative supplies or performing services in a different way) and take appropriate steps to mitigate the impacts of the outbreak;
- If appropriate, open up early dialogue with the other parties to agree necessary adjustments and manage expectations;
- Collect and retain evidence of disruption (actual or anticipated) resulting from the outbreak in case it is required to support your position;
- If entering into new contracts, make sure that appropriate clauses are included to cover eventualities such as the coronavirus outbreak;
- Consider also whether insurance cover applies and if so, notify your broker/insurer.
This is a developing situation and if you have any concerns about how your business might be impacted in a legal sense it is important to take early advice. Our team of commercial lawyers will be able to consider the potential effects with you.
Alternatively if you are already in a position where legal obligations are being breached or will be affected, you should speak to our dispute resolution team.
28 February 2020