Advice From Irwin Mitchell's Commercial Litigation Team
Coronavirus is having a significant impact on health and global economies.
But the virus is also impacting businesses, particularly those reliant on supplies from China, with factory shutdowns and restrictions on the movement of freight causing real disruption.
The disruptive effect of coronavirus may mean you’re unable to supply your customers within the contractually agreed terms, or even at all.
Being unable to supply customers because of coronavirus could expose you to a claim for damages for breach of contract.
But how can you safeguard your contracts against coronavirus?
What is a force majeure clause?
Many commercial contracts, particularly those involving international trade and construction, will contain a force majeure clause.
A force majeure clause can delay or relieve one party (or more) from all or part of its obligations due to events beyond its control. Such events may include war, strike, civil unrest and acts of God.
Whether an event preventing performance falls within the force majeure clause will depend on the wording and interpretation of the clause.
Similarly, whether the clause will terminate the contract or temporarily suspend performance will depend on the specific wording and interpretation of the clause.
Whether coronavirus will be seen as a force majeure event will very much depend on the wording of the clause.
There’s no common law right to delay one’s obligations under a contract or terminate it due to coronavirus. A force majeure clause must be an express term of the contract.
Of course, with a few exceptions parties are free to negotiate whatever contractual terms they wish.
Force majeure clauses are increasingly being negotiated due to uncertainty, such as Brexit and the effects of climate change. Businesses are already reviewing their standard terms due to coronavirus.
‘Frustration’ in law
A party may attempt to argue that it should be relieved from its obligations when it becomes impossible to meet them due to circumstances beyond their control. This is known as frustration.
But if a contract contains a force majeure clause, whether or not it covers the event, it’s difficult to establish frustration.
Other rights of termination or suspension of the contract
Other contractual terms may permit termination or suspension of a party’s performance in certain circumstances.
Situations such as a breach of contract by another party, a break clause or insolvency may be grounds for termination or suspension of obligations. But it’s best to act promptly in such circumstances.
A few words of caution
A party can expose itself to a claim for breach of contract if it suspends the performance of its obligations under a contract, terminates it, or even threatens to do so in the absence of a suitably worded force majeure clause or some other lawful reason. It can also cause significant reputational damage.