Quite apart from the consequences for the health and health services of the global population, the current Coronavirus crisis is already having and still threatens to have a huge impact on commercial agreements, unprecedented in recent times.
Here we consider the potential effect on the performance of contract obligations by businesses.
- Force majeure
The term ‘force majeure’ means an unexpected event such as a war, crime, epidemic or an earthquake which prevents someone from doing something that is written in a legal agreement. Force majeure clauses usually allow for the obligations of one or both parties to be delayed, suspended or even terminated on the occurrence of such an event.
However, in English law, ‘force majeure’ has no established meaning or consequences, so in order to apply the concept to a commercial agreement, there needs to be a specific force majeure clause in the contract and its scope will vary from agreement to agreement. Businesses should review each of their contracts to identify whether or not the respective force majeure clauses cover business disruption caused by the current Covid-19 outbreak. In particular, there are two key issues to consider:
- Is the COVID-19 outbreak covered by the definition of force majeure in the relevant contract?
Sometimes the clause will specifically refer to a pandemic which is helpful as the COVID-19 outbreak has recently been identified as such by the World Health Organisation. If the definition includes events beyond a party’s reasonable control, it would seem very likely that the current outbreak is covered, although such an argument cannot be guaranteed to succeed and will depend on the drafting, circumstances, intention of the parties and the extent to which this can be proved.
- How does the force majeure clause operate?
If it states that the relevant force majeure event must ‘prevent’ performance, the relevant party must show that performance is impossible and not just difficult or unprofitable. However, if it states that the triggering event must ‘delay’ performance, this word clearly has a wider scope, and this condition will generally be satisfied if performance is substantially more onerous. A mere increase in the cost of performing the contract, however, (for example employees arriving in a new country to fit out equipment in the country of the customer having to remain in quarantine before starting work) could still not be enough to trigger a clause with wording of this kind. In addition, the affected party must also show that it has taken all reasonable steps to avoid or mitigate the event and its effect on the party’s contractual performance.
So the current Covid-19 outbreak could and may well be a force majeure event, but whether it would be one that enables the performance under the contract to be delayed or terminated, depends very much on the specific circumstances applicable to the contract in question and any force majeure clause should also be checked to see whether it applies to all obligations under the contract or only some of them.
When drafting a force majeure clause for a new contract, businesses should consider adding pandemics, epidemics and other crisis situations to the list of force majeure events. Businesses should also consider amending their standard terms of business to make sure that their force majeure clauses cover pandemic situations and crises such as the current Coronavirus outbreak.
- Frustration
The doctrine of frustration applies where a radical change of circumstances means that performance of a contract is significantly different from the obligations that the parties originally entered into. Such a change in circumstances must be without the fault of the party seeking to rely on it and due to an outside event or change of situation that occurs.
Difficult to Establish
It is clear that courts in this jurisdiction are typically reluctant to find that a contract has been frustrated and it is normally the case that a force majeure clause or other express provision in the contract for the event in question will usually prevent the contract being frustrated. And, whether or not the agreement contains a force majeure clause, a contract will not be frustrated simply because it becomes harder or more expensive to perform or because the business has been let down by another supplier.
Effect of Frustration
When a frustrating event occurs, the parties are excused from further performance of their contract obligations and are not liable for damages for non-performance. It is important to bear in mind that the contract will be permanently frustrated. Temporary frustration (in essence, suspension) of the contract is not recognised and the courts will not amend the terms of the contract to reflect the effects of the event in question.
Legislation
The Law Reform (Frustrated Contracts) Act 1943 governs certain consequences of frustration and, except where otherwise agreed by the parties, it permits the recovery of money paid under the agreement before it was discharged, subject to an allowance (at the court’s discretion) for expenses incurred by the other party.
No doubt over the coming months and years there will be an increase in cases coming to the courts as a result of the Covid-19 outbreak so it will be interesting to see if they are more willing to make findings of frustration and in what circumstances.
- Insurance
Businesses may have some insurance to cover losses arising from certain types of business interruption. Many business interruption insurance policies however will not cover disruption caused by pandemics such as the current Coronavirus crisis, so the business should check the terms of their policies and ensure that the actual position is clarified.
Occasionally an insurer’s liability may be limited or excluded if losses arise from any public health emergency under a special business interruption insurance policy that covers disruption by large-scale staff absence, but any such policy will need to be carefully checked on this point. Obviously if there is such an exclusion or limitation of liability, then getting any replacement insurance which does cover the Covid-19 outbreak may be very expensive or not be possible at all. Whilst the government recently bowed to pressure to declare Coronavirus as a “notifiable disease”, a formal classification required by many insurance policies, the Association of British Insurers or ABI has warned that most business are unlikely to have cover as standard policies do not include disruption from forced closure by the authorities.
Where businesses also have keyman insurance and business travel insurance the following points should be considered:
- Keyman insurance may not pay out if the insured life ends because of travel contrary to public health or government advice.
- Corporate medical cover for any staff abroad may not cover an infected employee if they are infected after travelling to an affected region against official government advice.
- Corporate travel insurance might not cover trip cancellations if the employee or the company cancels for fear of disruption or infection, rather than the cancellation happening as a result of the government’s direction (usually communicated via the Foreign and Commonwealth Office or FCO) or an airline’s decision.
Policies such as those mentioned above should be reviewed and considered by businesses along with existing and future commercial contract terms to enable risk to be properly managed and for the potentially devastating effects of the Coronavirus crisis to be mitigated where possible.
If you need help with reviewing existing commercial agreements or preparing or negotiating new contracts, our Corporate & Commercial Team are ready and waiting to help. We’re in this together. For more information please contact Edward Barnes on 01244 354829 or at edward.barnes@dtmlegal.com.
