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23 Mar 2020

Navigating the challenges posed by the Coronavirus

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The disruption being caused by the coronavirus is giving rise to unique challenges that need careful management from an English contract law perspective.

In addition to managing the risks within the business (such as employee health and safety), businesses need to consider their interactions with suppliers and clients. The failure of a supplier to perform may put a business in breach of its contract with its client and vice versa. The following are not sensible legal strategies:

  • blaming the supplier to the client.
  • blaming the client to the supplier.
  • delaying dealing with the legal issues until the practical situation is resolved / improved. 
  • deciding what to do without carefully considering all of the relevant contracts and implications.

This article shares some thoughts to help businesses navigate the unique challenges being faced.

Frustration

English common law does not afford much assistance when dealing with coronavirus related business interruption. Under English law, a party is not excused from the performance of a contract simply because it has become more difficult or expensive to perform. Under the English common law doctrine of frustration, a contract may be discharged if, after its formation, events occur making performance impossible or illegal, and in certain analogous situations. Further, the doctrine of frustration does not apply if the parties have already provided for the circumstances in their contract (for instance using a force majeure clause). The high hurdles (illegality or impossibility) to establish frustration and draconian outcome of the discharge (termination) of the contract mean that the concept of frustration is not naturally apt to assist many businesses in the current circumstances. Few businesses are likely to want to bring many contracts to an end even if they have the evidence and, therefore, the opportunity to establish that the contract was frustrated at common law.

Force majeure

The concept of “force majeure” is often called upon to excuse a failure to perform in circumstances beyond a party’s control. Under English law, there is no doctrine of “force majeure”; it is a creature derived purely from contract and parties are, therefore, dependent upon the terms that they have previously agreed. If the specific event does not fall within the definition of “force majeure”, it cannot be a force majeure event. It is, therefore, important when considering whether to declare force majeure or what to do when faced with disruption due to coronavirus that the specific requirements of the contracts are considered.

Many contracts contain very specific requirements, such as the timing of the notice, form of the notice, how notice may validly be served and what information is required. The English Courts have previously adopted a strict approach, making it clear that failure to comply with the contractual requirements for force majeure notices will invalidate the claim to force majeure. This potentially leaves the defaulting party in breach and without a defence should a claim for damages be made for non-performance.

In addition, it is important to consider the effects of the specific force majeure clause. Some clauses operate to suspend performance until the end of the force majeure event, others operate to extend time for performance (payment or delivery) and others will operate to bring the contract to an end. Seeking to exercise the wrong option will not only be ineffective in providing protection but may, itself, be a breach of contract incurring additional risk of liability.

Further, parties to contracts should be aware that a force majeure in one contract, such as an agreement for the sale of goods, will not necessarily be a force majeure in another connected or related contract. This has the potential to cause an uneven allocation of loss in a chain of contracts. The chain or web of related contracts should, therefore, be considered together.

In considering whether coronavirus constitutes a force majeure event, careful consideration will need to be given to the cause of the disrupted performance. For instance, the clause may not include “epidemics” or “pandemics”. However, the prevention of performance may arise because a governmental body has prevented performance (i.e. a declaration of border closures by a government) which may be a permitted force majeure event. The full web of causation should be considered when exploring whether the cause of delay is due to force majeure.

If the contract permits serving force majeure notice it is usually in the businesses interests to do so promptly. Failure to do so within the time limits set out in the contract is likely to prejudice any attempt to later rely on the clause.

Renegotiation   

A practical solution in the current circumstances may be to seek to renegotiate the existing contracts, as many parties will be suffering from similar disruption and sympathetic to requests for extensions and variations. Initially, this may be done informally but, again, care needs to be taken. If a party indicates in conduct or words that it intends to perform the contract substantially in a different manner than agreed then this could amount to a repudiatory breach, allowing the innocent party to terminate the contract and claim damages. Negotiations should therefore be performed very carefully and written correspondence marked “without prejudice.” 

Further, if it is possible to agree revised terms it is necessary to ensure compliance with the contractual requirements. For instance, contracts often contain terms that preclude variations unless they are in writing and signed by both parties. An informal exchange of emails may not suffice.

Insurance

Whilst some businesses will have purchased business interruption policies, most of these are not designed to respond to business interruption caused by epidemics / pandemics. The majority only respond when business interruption is caused by physical loss or damage to insured property, e.g. if a factory suffers from a fire, the owner can also claim for the disruption to the business. It is, however, still worth checking the policy, as a minority of business interruption policies (typically only those bought by larger sophisticated businesses) do respond to disruption arising from infectious disease.

Conclusion

Businesses should conduct audits of which contracts are being performed properly and which are being disrupted due to the coronavirus. By identifying and developing a strategy for each disrupted contract, businesses will improve their prospects of successfully navigating the challenges posed by the coronavirus.

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KEY CONTACT

Simon Moore

Simon Moore
Partner

T:  +44 20 7809 2164 M:  Email Simon | Vcard Office:  London

Rory Grout

Rory Grout
Senior associate

T:  +44 20 7809 2668 M:  +44 20 7809 2668 Email Rory | Vcard Office:  London

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