Coronavirus is sweeping across the globe, and along with the serious health implications, businesses will be concerned about the effect the outbreak will have on their ability to trade. It is estimated that a fifth of UK workers could be on sick leave at any one time, should the virus take hold of the majority of the population. As such, without workers, businesses may be wary of their ability to fulfill their obligations under supply of goods/services contracts.
Most well-drafted supply contracts will contain a force majeure clause which provides for circumstances outside of the parties reasonable control, which cause a party to delay or fail in performing their obligations under a contract. The purpose of this clause is to alleviate the pressure on the defaulting party, by excluding or limiting their liability in these unforeseen, uncontrollable circumstances. The clause will usually provide examples of events considered to be force majeure, which may typically include an act of god, terrorism and natural disasters, amongst others. Epidemics (such as Covid-19) may be included as a force majeure event. It should be noted that force majeure events ought to be defined, because there is no agreed definition under English law.
Force majeure clauses may be broad, but they must also be reasonable in order to be enforceable. Drafting a force majeure clause can be difficult – too many defined force majeure events may be interpreted as trying to unreasonably limit liability. In the alternative, a non-exhaustive list of events may be deemed too wide, and consequently too vague. It will be the task of the party seeking to rely on the force majeure clause, to prove the event was outside of their reasonable control and has caused them to default under the relevant contract. They are also required to take reasonable steps to mitigate the effect of the event on their performance. Whether the default under the contract needs to be absolute, or simply delayed, will depend upon the drafting. A delay will provide more scope for reasonableness.
Sometimes, the force majeure clause may be expressed so that only one party may benefit from the clause, such as the supplier of goods or services, rather than the buyer.
Businesses should consider the contracts they have in place, and whether any of their obligations could be affected by coronavirus. They should consider if they can mitigate any delay or hindrance to performance, and importantly, whether they have sufficient force majeure provisions which cover an epidemic. It may be that the force majeure clause references epidemics, but if not, consider whether the effect of Covid-19 could fall under another event, such as a law or action taken by government (this could possibly be relied upon if there is a lockdown, for example). It is important to consider the specific clause in each set of terms and conditions, because they do tend to differ from contract to contract.
In the absence of a force majeure clause, depending on the exact circumstances, the law of frustration may operate to discharge/end the contract automatically, if a change of circumstance makes it physically or commercially impossible to perform the contract.
If you are a business looking to update your terms and conditions, or if you require advice to help understand the provisions of your contracts, please do not hesitate to contact a member of our commercial team.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.