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Coronavirus and force majeure in contracts: what’s covered?

UK businesses are entering uncharted waters as the COVID-19 crisis deepens. Faced with the cancellation of major events, disruption to supply chains and delays in delivery fulfilment, business owners are looking for urgent answers to their commercial questions.

A number of our clients have expressed their concerns, especially in relation to rights and obligations under commercial contracts. In particular, many are asking whether they can rely on the force majeure clauses in commercial contracts.

What does force majeure mean?

Force majeure refers to unexpected external events which impact the fulfilment of an obligation. Typically it applies to events beyond the parties’ control such as natural disasters like earthquakes or civil events like the outbreak of war.

There is no right to force majeure under English civil law. For the performance of a contract to be protected against force majeure, a commercial agreement must contain a specific force majeure clause. The clause should also define what constitutes a force majeure event, and this will vary from one agreement to the next.

My contract contains a force majeure clause: will my business be covered against the impact of the coronavirus?

Even if your contract does contain a force majeure clause, there’s no guarantee you’ll be able to rely on it. English courts have historically interpreted force majeure clauses very strictly, due to the effect it can have on parties’ rights and obligations. Whether the force majeure clause is drafted broadly enough to cover the coronavirus outbreak will depend on the wording.

What if the wording of my contract mentions an epidemic or pandemic in the force majeure clause, will my business be covered then?

If your contract’s force majeure clause provides for an epidemic or pandemic, then the coronavirus is likely to satisfy this definition, given The World Health Organisation’s classification of it as a pandemic. More careful consideration will be needed if the clause refers to ‘an act of God’.

However, other relevant factors will need to be taken into account, such as:

  • whether the coronavirus has hindered performance of the contract or made it impossible
  • whether the outbreak was foreseeable at the time the contract was made
  • the wording of the rest of the contract and the facts and context surrounding the contract and the parties

What if I can’t carry out a contract any longer due to cost?

According to settled case law, a contract becoming expensive or uneconomical does not constitute a force majeure.

Other relevant considerations include whether the party seeking to rely on the clause:

  • could have taken any reasonable steps to avoid the effects of the force majeure events
  • complied with any requirements of the clause e.g. giving notice

What about frustrated contracts?

It’s worth considering what the Frustrated Contracts Act covers. This legislation suspends contracts where an unforeseen event makes the contractual obligations impossible, or radically changes a party’s principal purpose for entering into the contract.

However, bear in mind that there are very few instances where a contracting party has successfully claimed that a contract has been frustrated. The frustrated contracts route should only be considered a last resort.

What steps can I take now to minimise the risk to my business?

To mitigate the potential issues your business may face as a result of this outbreak, you should:

  1. Consider existing contracts which may be affected by the outbreak of COVID-19 and, in particular, which rights and obligations are in danger of being breached
  2. Review the wording of any force majeure clauses to see whether any breaches may be covered by the clause. Relevant words to look out for include: pandemic, disease, crisis and government action
  3. Communicate with suppliers and consumers to discuss the possible disruption and the potential renegotiation of certain contractual terms
  4. Seek legal advice before attempting to rely on a force majeure clause
  5. Consider the wording of future contracts to ensure protection in the event of further outbreaks of COVID-19 in the coming weeks and months

If you aren’t sure about a force majeure clause, or want further advice regarding commercial contracts in light of the current global outbreak, our Commercial Team can help.

For more information and resources following the COVID-19 outbreak, visit our legal support hub for businesses or contact us directly for our client services team to coordinate support from our team of solicitors.

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