COVID-19 has changed the scope of business contracts in a variety of ways including the performance of contractual obligations. It is important for businesses to recognise their legal standing and the contractual issues they may be facing in light of coronavirus, so that they are not exposed to a claim for damages.
Whether a party can suspend or terminate a contract due to the current climate will depend on a number of factors and the specific circumstances of the contractual terms in question.
Unforeseen circumstance clauses contained within contracts are often expressly referred to in force majeure clauses in contracts. A force majeure clause will typically allow parties to renegotiate, extend, suspend and/or terminate the performance of the contract when an unforeseen or unexpected event has occurred. Force majeure is not a doctrine of English common law, meaning it is not implied in a contract. Therefore, parties wishing to rely on this clause must expressly insert a force majeure clause into a contract to rely upon it. Parties will often insert a force majeure clause to allocate risk between them when negotiating the drafting of a contract. Unexpected global events, such as the Coronavirus pandemic has the obvious ability to significantly disrupt the performance of a contract and is an example of where some force majeure clauses would be scrutinised quite carefully for who ultimately bears the loss.
Is COVID-19 a force majeure event?
Force majeure clauses must be specific, as the consequences of an unexpected event will be determined by the interpretation of the clause by the courts. The clauses will be examined in great detail to determine whether they can be taken to cover the intervening event and to ascertain whether the event is materially relevant to the performance of the contractual obligations in question. Whether a force majeure clause has been triggered in a contract will depend entirely on the exact wording that the parties have used, this often includes a non-exhaustive list of events. For example the presence of words such as: “pandemic”, “epidemic”, “outbreak”, “government action”, or “crisis” will be crucial in parties being able to argue that their force majeure clauses apply to the current circumstances.
It is the duty of the party seeking to rely on the clause to prove that the force majeure event has significantly prevented or delayed them from performing their contractual duties. Classic Maritime Inc v Limbungan Makmur  EWCA Civ 1102 suggests that the party looking to rely on a force majeure clause must have been willing and ready to perform the contract, even if the exceptional event had not occurred. The unexpected event must be the cause of the failure to perform the contract, rather than an excuse if the underlying problem is something else. Therefore, to give a current example, it isn’t enough that COVID-19 was around at the same time as the breach of contract, it has to be the cause of the breach.
The English courts have previously not looked particularly favourably on reliance of force majeure clauses. However, the current climate makes it more likely than ever that parties will try to rely on force majeure clauses; due to the vast economic impact the pandemic is having on society and in turn, the impact it will have on the ability to perform contractual obligations. The Courts will not offer general guidance for this particular area of law, rather they will consider the cases on their individual merits.
What if the contract does not include a force majeure clause?
If force majeure is not a clause defined within a contract, parties may try to rely on specified time periods, which could warrant automatic termination. Parties will often scour their contracts for any clauses which provide flexibility, such as an option for the parties to terminate or renegotiate the contract, or any redress clauses. These clauses would need to be specifically drafted within the contract for them to take effect.
Further, if a force majeure clause cannot be invoked, parties may seek to rely on the frustration of a contract to bring the contract to an end. A contract can be frustrated when something occurs after the formation of a contract, rendering it impossible to fulfil. Similar to force majeure, the burden of proof for frustration is on the person seeking to assert it. COVID-19 may possibly be a factor that parties can rely on when considering if their commercial contract has been frustrated, however this will heavily depend on the circumstances and wording of the individual contract and will often require parties taking detailed specialist advice.
The realities of a global pandemic may require parties to be forced to re-negotiate aspects of a contract if the situation changes, since each contract is analysed on its own merits; however this would need to involve constructive communication between all parties involved and potentially the involvement of specialist providers of mediation services. It is important to understand the different legal and practical implications of that COVID-19 might have on current or future commercial contracts.
Our commercial contract lawyers are experts in this field and can provide practical and specialist advice during this difficult time.
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