Covid-19 – Is it an excuse for non-performance of a commercial contract?

6 Apr 2020

Covid-19 is starting to have a significant impact worldwide, affecting supply chains and daily commercial operations. While the short-term implications have seen many businesses close their doors entirely or switch to remote working where possible, the long-term impact on meeting contractual obligations is just being felt. To what degree will companies be excused for missing contractual deadlines and commitments in light of coronavirus?

Covid-19: a force (of nature) majeure

The legal impact of missing contractual deadlines largely depends on the presence of a force majeure clause. This clause refers to entirely unforeseen events outside of the company’s control, impacting their ability to perform and fulfil contractual obligations. The surfacing of coronavirus and the immediate effect on travel and large gatherings immediately brings into question the triggering of the force majeure clause.

The definition of the coronavirus pandemic may directly affect whether a force majeure clause can be used as a reason for non-performance. Does the contract clause contain this specific phrase? Is there a catch-all expression in the contract to cover a pandemic, like ‘Act of God’? In addition, English common law does not recognise force majeure, meaning it must be expressly in a contract to merit consideration.

In the absence of a force majeure: frustration

If you do not have a force majeure clause in your contract, you may need to consider frustration. You could also use this aspect of English law if the term ‘pandemic’ or ‘Act of God’ is not in your contract clause.

Once a contract is ‘frustrated’ it means the original agreement is now commercially impossible, or the fulfilment of the contract is now wholly different to the original terms agreed. Under English law, frustration automatically discharges both parties from the contract, so there is no legal commitment to perform their obligations.

Performance related to pandemics: proving the link

Even if the contract does contain a force majeure clause, to prove the company’s inability to fulfil the contract, they will need to show that non-performance was directly related to the coronavirus outbreak. The law will also take into consideration what was explicitly intended by the clause when the contract was drawn up, to establish whether force majeure can be triggered.

It will also specifically apply to the conditions of the contract under consideration and the nature of the affected business. If, for example, government legislation limits the size of a gathering, the

company may be still able to hold that event until it is cancelled altogether, meaning the clause may not be triggered. However, if a function could no longer be held due to the closure of a facility, it may have a far more favourable outcome for the company as they physically can no longer perform that obligation of hosting the event under contract.

The law will assess whether you had time to prepare for the impact of coronavirus on your business. While the spread of an outbreak is beyond any businesses control, the fact of its existence was not entirely unforeseen. So the interpretation of the force majeure will depend on an assessment of how far you could (and did) prepare for your business to be impacted.

When to invoke force majeure

Triggering force majeure will have long term implications for your business, especially if the outcome is the suspension of a contract with a longstanding and essential client. Considering your commercial insurance options may help with decision making. Depending on the terms of the agreement, invoking force majeure may lead the other party to consider this a breach of contract.

By stark contrast, other contracts may instead necessitate an early announcement to use it as a defence for non-performance. Contacting a professional before taking action will be the best way to ensure the clause will work for your business.

Once force majeure is triggered, the outcome of this will vary. It may mean the ending of all contractual obligations on the part of both parties, or renegotiations, extensions, and either a waiver of liability or a requirement on the triggering party’s part to reduce the severity of losses. These outcomes will also depend on the invoking party being able to prove they were prepared and intending to execute their contractual requirements before the pandemic took place.

Seeking advice in uncertain times

You may be uncertain as to whether your force majeure clause covers the coronavirus, or want to seek legal advice on non-performance of your business under frustration.

It is more important than ever to protect your business by seeking professional advice on whether invoking a force majeure clause will be beneficial to your business. It seems inevitable that force majeure will come into play shortly, so future-proof your business by seeking advice today.

This note comprises the view of the author as at 30th March 2020. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.