As the devastating impact of the coronavirus pandemic continues, so does the uncertainty surrounding its effects on businesses. In a short space of time, companies have had to change their usual practices to comply with government advice which, depending on the sector in which the business operates, has proved a greater challenge for some than others.
Many companies are having to work with fewer staff and reduced resources. Where there is a supply chain in operation, these reductions in staffing and resources will undoubtedly cause a knock-on effect on productivity and the ability to meet deadlines. Understanding how this pandemic will impact a company’s contractual obligations with its customers and its suppliers is, therefore, crucial for businesses looking to assess where they stand during what is both a health and an economic crisis.
Force majeure
‘Force majeure’ is the phrase used in contracts to cover the occurrence of events which are outside either party’s control, for example, natural disasters. It is common for a force majeure clause to be included in a contract, the purpose being to excuse a party of liability for failing to perform their side of the deal in certain circumstances. If you have a clause like this in your contract, it is important to check how and to what extent ‘force majeure’ has been defined.
The question is: is the coronavirus pandemic classed as a force majeure event? This is completely dependent on how the force majeure clause in a contract has been drafted. Although it is extremely rare for express reference to be made to a pandemic or an epidemic, it is arguable that the current circumstances may fall within one of the more common listed examples – government order, national emergency, business interruption are all more arguable than act of God or natural catastrophe. If that can be established, then does the contract identify the next steps when a supervening event such as a global pandemic occurs?
Usually, a force majeure clause will allow for one or both parties to be excused from performing the contract, or alternatively, will allow one or both parties to suspend or defer their contractual obligations for a defined period. The effect of exercising such a clause again completely depends on the specific circumstances and how the relevant clause has been drafted.
Frustration of contract
In contract law, ‘frustration’ comes into play in the event that it is impossible (for example legally or physically) for both parties to carry out the obligations within a contract due to unforeseen circumstances. Impossibility can be caused, for example, by disruption to the supply chain. If a contract is frustrated then it terminates without liability from either party to the other for any failure in performance, save for the possible reimbursement of costs and expenses already incurred.
Frustration is extremely difficult to establish and cannot be relied upon if the parties could and should have foreseen the supervening event when the contract was entered into or in circumstances where there is a valid clause in the contract that could be relied upon to deal with the issue at hand instead.
One of the key factors which a Court will consider when assessing whether a contract has truly been frustrated is what was the original purpose of the contract. This is why contracts relating to events are often held to have been frustrated – if you have a contract to supply tennis balls for Wimbledon and that event is cancelled then the supply contract will be frustrated.
If a party to a contract, having taken specialist advice, wishes to argue that the contract has been frustrated because it can’t commit to every part of that contract, then it should immediately stop trying to perform the contract as to continue to try half heartedly will simply open that party up to liability.
Variation of contract
However, it may be preferable for both parties to agree to vary or renegotiate the terms of the contract to enable business to continue without the risk of claims being brought against each other. In those circumstances, careful consideration must be given to how a particular variation might affect other terms of the contract and how that variation would work in practice.
Going forward
Unfortunately, we are still in a very grey area in terms of knowing exactly how this pandemic is going to affect our businesses and there is likely to be a significant volume of case law over the next few years which will deal with these contractual issues.
Businesses may be stuck with the terms they have committed to in their existing commercial contracts but now is the time to ensure that comprehensive protection is built into any new contracts with customers and suppliers.
Watch out for further briefings from our Corporate & Commercial Team as more guidance is issued from the Government during the current pandemic and the Courts start to hand down decisions on both force majeure clauses and frustration.
How we can help
In the meantime, if you have an enquiry regarding any of your existing or proposed new commercial contracts and would like to speak to a member of our Corporate & Commercial Team, please contact us on 01244 354670 or by email at law@oliverandco.co.uk.
