Coronavirus (COVID-19): How can it affect commercial contracts?
06/04/2020
As the government implements strategies to control the spread of COVID-19, businesses are faced with a number of challenges. This will include increased contractual risk as either you or your counterparty may not be able, and may not want to, perform its contractual obligations.
Frustration
A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
However, frustration is a complex area of law and only applies in limited circumstances; the Coronavirus may genuinely have frustrated a contract but this is unlikely to affect obligations incurred before the time of the frustration event and, often, parties will have made express provision in their contract for the particular event (e.g. force majeure, which we will come on to now).
Force Majeure
A force majeure is an unforeseeable event or circumstance that prevents a party from fulfilling its obligations under a contract. Whether or not a party can rely on a force majeure event will depend on the express terms of the contract between the parties.
Supply contracts often contain force majeure clauses that excuse one or both parties from their obligations under the contract. Such clauses can allow the parties to temporarily suspend their obligations under the contract or excuse them completely.
Is the Coronavirus a force majeure event? Unfortunately, the answer is: it depends. Many standard force majeure clauses will expressly set out specific events such as acts of God, flood, drought, earthquake or other natural disaster, terrorist attack, civil war, civil commotion or riots or war, etc., and whether or not COVID-19 will come within the meaning will depend on the express wording of the definition of force majeure in the contract.
Even in it falls within the definition there are other factors which must be considered in order for the force majeure clause to apply, including whether the Coronavirus caused the failure to perform the obligations under the contract and whether it can be overcome.
In addition, there is a duty on both parties to mitigate the effects of the force majeure and the entire clause may be unreasonable under the Unfair Contract Terms Act 1977 (UCTA), particularly in standard form terms of business.
How we can help
For advice on the matters discussed above, please get in touch with your usual contact at Warners for a free initial telephone consultation.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.