What does Coronavirus mean for my contract?

 

The current Coronavirus pandemic poses a huge issue for businesses both large and small as well as people generally.  Restrictions on social interaction has resulted in the cancellation of not only major public events, but also the forced closure of bars, restaurants, clubs etc and some really difficult decisions for other smaller high street businesses.  Businesses throughout the world have had to find different ways of working or face the reality of closing whilst this pandemic is weathered.

Understandably many people are asking what effect the pandemic is going to have on any contract that they or their business is tied to.  The general rule is that, subject to the contract being bound by English law, parties who are in agreements that require ongoing performance could be liable to their counterparty should they fail to meet their obligations.  There are, however, two potential exemptions:-

  1. The operation of any force majeure clause in the relevant contract; and
  2. The common law concept of “frustration”.

Force majeure

A contract will typically contain a force majeure clause, which will ideally set out how the parties’ obligations are affected by an event that affects one or more of the party’s ability to perform.  These clauses do not have set wording and so can be different.  It is important therefore that specific advice is sought for each circumstance.  However, general considerations will usually include:-

  1. Whether an event such as the Coronavirus pandemic is covered as a force majeure “event” so as to trigger the clause;
  2. Whether there has been a governmental decision or administrative action preventing performance that meets the “political interference” wording that is typically used in definitions of force majeure;
  3. Has the party seeking to rely on the force majeure clause established that it was the Coronavirus event that has prevented or hindered it from performing its obligations;
  4. Is the affected party under a duty to try and mitigate (i.e. reduce) their losses; and
  5. If the force majeure clause has been triggered, what does that mean for the contract itself.

It is likely that the answers to these questions will be far from clear without the benefit of legal advice.

Frustration

Should the agreement not have a force majeure clause the parties might be able to rely upon the doctrine of “frustration”.  This is a common law right that provides that a party is discharged from its obligations under a contract if the circumstances make it commercially or physically impossible to perform them, or would mean that performance would be radically different to what was intended.  The courts have confirmed that the bar to meet in order to claim frustration is high and that the circumstances in which it can be relied upon are narrow.

However, that does not mean that there will be no cases in this pandemic that reach the bar to claim frustration, but this is likely to be limited to very exceptional circumstances, such as performance in a region subject to a state-imposed lock down.

What to do

Businesses would be well advised to seek legal assistance as soon as possible should their work be interrupted.  Insurance policies should also be reviewed to understand whether any claims could be made, such as business interruption.  Many, if not all, insurance policies will contain a strict time limit in which a claim is to be brought to their attention, failing which it could be lost.

Find out the ways Nexa can help you by contacting Daniel Jenkins on 020 7504 7071 ext 25 or daniel.jenkins@nexa.law

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