Business contracts and the coronavirus outbreak

March 18, 2020

You will want to think about whether your business can stop carrying out its contractual obligations due to the coronavirus outbreak. You might be worried that your suppliers will stop carrying out their contractual obligations.

The 'force majeure' clause in contracts is meant to cover circumstances, such as the coronavirus outbreak, which are outside anyone’s control.

What is a force majeure clause?

A force majeure clause sets out the rules which applies, if an event outside the control of the parties to a contract, stops a contract being carried out

Typically, if a party is stopped from performing its contractual obligations due to a force majeure event, that party is not liable to the other party. If the force majeure event continues for a certain period of time, one or both of the parties may also be able to end the contract. There may be conditions before the force majeure clause can apply.

The effect of a force majeure clause is to allocate the risk of the unexpected event between the supplier and the customer. If the supplier is excused for failing to perform its obligations, then the customer takes the risk of those obligations being unperformed.

The customer may be comfortable to wait and for supply to be delayed. But if the customer is relying on supplies to supply its own customers, the customer will be in difficulty.

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Things to consider whilst reviewing your force majeure clause

The exact wording of the clause will need to be reviewed with these following questions.

1. Is the coronavirus outbreak a force majeure event?

Some force majeure clauses list specific categories of 'events' which constitute force majeure. If coronavirus (or, more likely, an epidemic or pandemic) is not listed, then there will be no force majeure.

The force majeure clause may still apply if one of the listed events is a government restriction, for example, a ban on travel.

Some force majeure clauses also refer to a general ‘any event beyond the reasonable control of the parties’. If so, the force majeure clause is likely to apply.

2. Does the coronavirus outbreak impact on the party's ability to perform its obligations?

The party looking to be excused from contractual performance usually also has to show that the 'event' impacts on its ability to perform its obligations.

If the clause requires a party to be 'prevented' from carrying out its obligations (rather than 'hindered' in doing so), then a management decsion not to perform the contractual obligation is unlikely to satisfy that test.

On the other hand, if the business cannot comply with its contractual obligations because of a government restriction designed to slow the spread of the virus prevents it from doing so, then the force majeure clause will probably apply.

There will be a spectrum of circumstances in between, which will require careful review of your contract in the context of those circumstances.

3. What are the consequences of the force majeure clause being triggered?

You will want to consider which party bears the financial consequence for the force majeure event.

If the contract be terminated, you will need to follow the process for termination carefully. The party wanting to use the force majeure clause may, for example, need to serve a notice on the other party. The affected party may required to take steps to mitigate the consequences.

There may be an option to extend delivery times under the contract. Your supplier may be able to make a choice on which customers to supply, for example, if there are shortages of supplies.

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What should you do?

You will need to keep an eye on any force majeure clause in your commercial contracts since he coronavirus situation is likely to change over the coming months. You should be taking the following actions:

Understand your position early

You should review your contracts early if you think that your business, or your suppliers, may not be able to perform contractual obligations as a result of the coronavirus outbreak. This will allow you to identify your risks, and put in place appropriate mitigation.

Coordinate your overall approach

Decisions taken in relation to working practices, such as client visits, may affect service delivery under your commercial contracts. You should coordinate your approach in all parts of your business to identify and manage risks early.

Consider your insurance cover

You should consider whether your insurance policy covers losses associated with the coronavirus outbreak, and if it does, ensure that you comply with any notice provisions and other requirements of the policy.

Engage pragmatically with your customers and suppliers

You should engage pragmatically with your customers and suppliers, as in many cases, the application of a force majeure clause to the particular circumstances may not be clear cut. You will want to be thinking about long term business relationship consequences of relying too strictly on force majeure provisions in your commercial contracts.

Review your contractual dispute resolution process

You will also need to be making yourself familiar with contractual steps provided in your commercial contracts to resolve disputes with your customers and suppliers. Although you would hope not to use these steps, you will want to react speedily to disputes with an informed knowledge of the legal background.