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Coronavirus – What about my Contract?

Mar 17, 2020

Coronavirus is having an unprecedented impact on the business and personal lives of everyone. Putting aside the obvious complications of trying to avoid social contact and staying healthy; the next big headache is how to keep businesses moving forward properly.

This is when looking closely at the terms of your Contracts will be essential. If you have a “force majeure” clause that might be sufficient to give you the right to suspend performance of the contract or even in some cases terminate it. If there is no such clause in your Contract then there is no provision in the civil law system that allows it to be implied. It is either there or it is not.

Force majeure is designed to cover such things as war, acts of God, riots, Government Orders that might make something unlawful or banned for a period of time; earthquakes and the like. It is a lawful reason as to why you cannot fulfil your obligations under the Contract.

Another possibility is “frustration” which is where a Contract cannot be completed because of an event both unforeseen and uncontrollable and which is beyond the control of the parties. Again the legal hurdle for this is very high as frustration brings the Contract to an end. Brexit was not regarded as a frustration event when in 2019 The European Medicines Agency (EMA) tried to get out of the £500 million lease in Canary Wharf on the basis that they had no remit to operate in the UK if the UK was not part of Europe.

Inevitably there are going to be legal arguments pursued through the Courts over the question of whether COVID 19 is an event that allows a party to use a force majeure or a frustration clause. If you are claiming either principle applies to the Contract you want to suspend or end – the onus is on you to prove that and no one wants to be the “landmark case” that decides the principles that others can then use and rely upon.

So what else can you look at?

Different industries may have certain types of contractual requirements that might give you scope to rely upon:

Those with supply chains may have clauses that provide remedies in the event the supply chain is disrupted. There may be “time is of the essence” clauses that provide for timely delivery and if that is not met, entitles the other party to immediately terminate the Contract. The concept of a virus might not have been expected to be the cause – but if what amounts to “disruption” is defined and has taken place or time under the “time is of the essence” has expired, you should be able to rely on them.

Financial contacts often contain clauses that refer to material adverse change. These can enable a financial institution to decline to perform its obligations if the other party is experiencing material adverse change. The question to be considered is has the event had (or indeed will it have) a material effect that means the other party is unlikely to be able to perform its contractual obligations.

In the Construction Industry there may be an entitlement to seek an extension of time if there are e.g. shortages of available manpower because of government requirements to stay at home or self- isolate; plant and materials are in short supply because they cannot be imported into the UK or are stuck unable to be transported. If there is an extension of time, does the Contract also provide for additional payments or compensation.

Even if you don’t think you have a clause that means you can bring the Contract to an end – do your terms and conditions limit liability? Clauses limiting liability provide a cap on the claims that can be made if you are the business in default.

Be careful about Contracts that you are about to enter into – certainly it is unlikely you would then be able to rely on a force majeure/frustration clause if problems arose later, because COVID19 is no longer an unforeseen event.

Keep detailed records of any issues that mean your business is struggling to fulfil its contractual obligations. Document steps taken to try and mitigate any loss caused – these may well be crucial if claiming on insurance or seeking to defend your position in Court.

Once you are clear on what your Contract does and does not allow you to do – talk to your suppliers, the other contractual party etc – they will also be affected by the current situation and ultimately once we are out the other side of the current crisis; you will want to do more business with those that collaborated in reaching a solution and less with those that did not.

If you need help navigating your Contract or understanding what your position is contact our team on drteam@herrington-carmichael.com or Frankie Tierney Head of Dispute Resolution at Frankie.tierney@herrington-carmichael.com

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

Impact of Covid-19 (Coronavirus) on commercial contracts: Some Practical Tips

Businesses are facing increasing uncertainty in light of the rapidly evolving Covid 19 (Coronavirus) situation. As matters develop, a growing number of businesses are finding it impossible, or at least more difficult, to deliver on their commercial promises.

Click here to read more >

By Frankie Tierney

Head of Disputes & Claims 

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