Coronavirus and Contractual ObligationsPublished on: 17 March 2020
Following the World Health Organisation’s classification of COVID-19 as a pandemic and the increasing restrictions being imposed by the British Government to limit the spread of the virus, many businesses are becoming concerned at the financial risks these measures may entail.
The jeopardy which exists for businesses in the wake of this pandemic is not just in its workforce being unable to carry out their roles but in the ability for it to carry out contracts in the face of the prospect of increased limitation of public movement/gatherings.
The ability to perform, and receive performance of, contracts is essential to the existence of commercial entities. The continued supply and receipt of goods and services ensure their continued profitability and survival in a competitive marketplace.
The majority of contracts will, almost inevitably, require a human element for their execution, whether that be the production, or shipment, of goods or the provision of services. Should the British Government follow the lead of their European counterparts in imposing restrictive measures on public movement, the human element may be unable to perform its obligation under contract.
If a party to a contract does not carry out its obligations, it can be said to be in breach of the same, giving rise to the unpalatable prospect of litigation in addition to lost revenue.
What Should You Do?
There are proactive measures a business can take in order to try to mitigate the financial risk posed by acts of government restricting its ability to perform contractual obligations:
Conduct a review of all active contracts for the supply or receipt of goods/services, specifically clauses in relation to the cancellation or suspension of parties’ obligations or ‘Force Majeure’ clauses.
Force Majeure clauses operate to relieve parties’ obligations if a trigger event occurs which is beyond the control of either party. The concept of Force Majeure does not exist unless it is included by an express provision (meaning it will not exist in oral contracts). In the absence of a Force Majeure clause, the parties would need to rely on the doctrine of frustration.
The law of frustration, in a similar way to Force Majeure, relieves parties’ obligations in the event the contract is unable to be performed by an intervening act, which makes that which was agreed to be carried out impossible to perform. Although, rather than suspending the parties obligations, frustration effectively ends the contract. The scope for claiming frustration is far narrower than establishing Force Majeure under a properly drafted clause, meaning there is less chance a party will be successful in claiming it.
Conduct a review of relevant insurance policies. There may be circumstances in which a business could claim some, or all, of its losses incurred under an existing policy of insurance.
Stay up to date with all developments as they happen. Many Force Majeure clauses contain a notice requirement, which requires the affected party to make the other party(ies) aware it is seeking to trigger the clause.
If you intend on providing such notice, be sure to comply with the requirements to give notice under the appropriate contractual clause (if there is one).
Consider ways in which the effects of the failure to perform the contract may be mitigated. In addition to limiting the impact on a business’s revenue, considering mitigation is often a requirement for claiming Force Majeure.
What Can Lanyon Bowdler Do to Help?
Our Corporate and Commercial team has decades of combined experience in helping businesses plan ahead, particularly in times where the future can be unclear. Our firm can conduct reviews of current supply or service contracts as well as any insurance policies a business may have, advise on likely issues and help draft agreements with appropriate clauses to protect against the uncertain.