DOES CORONAVIRUS CONSTRAIN YOU CONTRACTUALLY ?
Updated: Mar 23
As the global impact of COVID-19 or #coronavirus – consider how your business' contractual agreements might respond to potential disruption, as well as other hashtag#risk management strategies that you should consider. http://bit.ly/39NHpQk hashtag#law
As the global impact of COVID-19 – more commonly known as coronavirus – accelerates, we consider how your business' contractual agreements might respond to potential disruption, as well as other risk management strategies that you should consider.
The World Health Organization has declared the outbreak of the coronavirus a public health emergency of international concern, and there are growing concerns amongst companies of the implications for their businesses and their commercial agreements.
With some business clients already reporting operational disruptions, we review below some potential contractual protections, and risk management strategies, that you may wish to consider.
Potential contractual protections
If the performance of your obligations has been impacted by the coronavirus outbreak, it may be that your existing contractual terms provide protection. The most likely source would be any ‘force majeure’ protections, designed to be invoked if the performance of the contract is prevented by events outside of the affected party's control. Typically, the affected party’s non-performance is excused provided it is a consequence of an event that qualifies as ‘force majeure’.
However, this depends on how force majeure has been defined and the specific circumstances that are affecting performance. We recommend that a review of the relevant contractual terms is an essential first step for any business with concerns in this regard.
Please note, even if the outbreak is covered, notification obligations will almost certainly apply and potentially also a duty to mitigate the impacts. A failure to comply with these requirements may invalidate your force majeure claim. A prolonged period of Force Majeure (“FM”) may also a trigger termination rights.
Supply chain issues
You should consider that your suppliers and contractors will also be affected and looking to rely on contractual protections for their own non-performance. If this is a concern, we advise that you consider the impact on your supply chain and any contingent obligations you may have, and review the terms of all relevant agreements accordingly.
Other legal remedies
Under English law, a contract may be deemed ‘frustrated’ by an event that occurs after the date of the contract, without the fault of either party, that either transforms the obligations into something radically different, or makes it physically or commercially impossible to fulfil the contract.
If frustration is proven, the parties would be discharged from further performance of their obligations (although please note there are other consequences – including potential compensatory payments which would also apply, with the relevant rules here particularly complex).
In practice however, it is difficult to establish frustration and the courts have demonstrated a clear reluctance to do so, particularly in business-to-business contracts. A claimant would need to demonstrate that no alternative method of performance is possible. Frustration also cannot be claimed simply because performance has become more expensive or because a party has been let down by one of its suppliers.
Recent case law has also shown that courts will go to great lengths to try and identify a term of the contract that addresses the consequences of the relevant event (such as a force majeure clause) rather than declare it frustrated.
A prudent risk management strategy would, in our view, would be to:
assess the potential impact of coronavirus-related disruption on your business;identify relevant material contractual obligations that may be affected;consider whether there are alternative means of performance are available and/or any proactive steps that could be taken to mitigate potential future impacts;consider whether contractual protections apply (e.g. force majeure relief) and identify any notice obligations that may have been triggered, as well as any applicable mitigation obligations;manage communications with counterparties and ensure a consistent approach is taken; andactively monitor the situation going forward, including keeping informed of local regulatory actions and restrictions.
You may also wish to consider whether your standard terms of business and any agreements currently under negotiation would benefit from expressly addressing the allocation of the risks associated with potential coronavirus-related disruptions to performance.