It is a concerning time for millions around the world both in terms of the health impact of COVID-19 and its effect on business operations as a result.
Many businesses will already be reviewing their commercial contracts and arrangements in order to understand how the coronavirus outbreak will affect them. Who bears the financial risk in the event that parties are prevented from carrying out their usual business activities and what steps can be taken to minimise the effects of the disruption are all going to be in sharp focus.
Force Majeure clauses
Of particular significance in the present circumstances may be the inclusion of a force majeure clause in any commercial contracts. A force majeure clause generally provides that one or both of the parties to a contract may be excused from performing its obligations when an event occurs which is outside the parties' control. In a previous blog the example of a storm interrupting the Rugby World Cup was given. The coronavirus pandemic and intervention of the UK Government in day to day activities may be another which has far more severe and wide-reaching consequences.
In the UK there is not a precise or default definition of force majeure. Therefore, whether or how such a clause will apply to UK contracts in any particular circumstances will depend upon the wording of the clause. General terms such as "act of God", "Government interference" and "not reasonably foreseeable" are often used and may be open to interpretation. However, given that the triggering of a force majeure clause may result in a party being released from liability (either temporarily or permanently) for failing to fulfil its contractual responsibilities, more specific occurrences or events can be described or listed in the contract in an attempt to create certainty. For example, there may be reference to the outbreak of a disease, an epidemic or a pandemic.
If it is not clear from the contract whether a particular occurrence or event is covered, or what the consequences will be in the event that it is - such as the suspension of the operation of the contract, an extension of timescales for the performance of obligations or even a right to terminate the agreement, this may cause difficulties for the party seeking to rely upon the clause and it could potentially lead to a long and expensive dispute.
There are numerous examples of commercial contractual disputes which have arisen in relation to a party's attempt to invoke a force majeure clause (or frustration of contracts generally) following the occurrence of an event which was beyond anyone's control and the other party's refusal to accept it as a basis for non-performance of the contract. Unfortunately, the recent coronavirus outbreak may give rise to many more and, in the case of UK contracts, it will be necessary to consider the wording of the clause and the particular circumstances which have arisen in order to establish each party's obligations.
Businesses which do this in anticipation of further disruption and the potential for a dispute to arise may be better equipped to manage their commercial relationships accordingly and prevent any unnecessary escalation and, for those who are in the process of negotiating or re-negotiating contracts, there may be provisions which can be put in place in order to ensure that their business is protected as far as possible.
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Senior Associate
