Commercial consequences of Covid-19

The outbreak of Coronavirus is an ongoing pandemic that poses huge issues for businesses across all sectors and of all sizes. Businesses have been forced to cease, suspend or drastically change operations and, as well as various other issues, may need to consider the contractual issues arising from this situation in relation to the various contracts the business is a party to.

At Endeavour Partnership, our experienced commercial solicitors are well versed in such issues and are here to help and guide you and your businesses through these challenging and unprecedented times.

Contractual issues

Under English law contracts requiring ongoing performance are, generally speaking, absolute meaning a contractual party affected by Coronavirus will, technically, still be required to perform its obligations in accordance with the relevant contract and will be potentially liable to the other party for any failure to do so.

There are two common ‘exceptions’ to the above rule which are:

1. Force majeure clauses; and
2. Frustration

Force majeure clauses

Where a contract contains a force majeure clause, it will usually deal specifically with how the parties’ obligations are affected by an event beyond either or both parties’ reasonable control and that affects a party’s ability to perform the relevant contract in accordance with its terms. Force majeure clauses differ from contract to contract and so the particular clause in question will need to be construed carefully to ascertain how it operates to the circumstances in question. That said, some common matters to consider in such clauses are:

1. Whether the Coronavirus pandemic is covered expressly and specifically as a force majeure event in the relevant contract and, even if it is expressly covered, there may be other requirements that still need to be satisfied for the situation to constitute force majeure; and
2. If not expressly and specifically covered as a force majeure event, whether the Coronavrisu pandemic is the type of event that would fall under general force majeure wording, or whether it (or a particular outcome/result of it) would fall under another expressly and specifically referenced force majeure event.

The party that is seeking to rely on the force majeure clause must usually establish that the force majeure event has prevented or hindered it from the performance of the contract (although the exact wording of the contract needs to be checked in this regard). This is, in the main, a factual question but, again, will also turn on the exact wording of the clause. For example, some force majeure provisions require performance to be impossible, which is a significantly higher burden than a clause requiring performance to merely be hindered or reasonably prevented.

The party that is seeking to rely on the force majeure clause is usually under a duty to show that it has taken reasonable steps to mitigate or avoid the effects of the force majeure event and there will usually be specific notification and other requirements contained in the clause that needs to be adhered to in order to ensure a party can rely on the clause in question. Again, the exact wording of the clause needs to be reviewed and navigated carefully to ensure that an administrative slip up does not prevent a party from relying on the force majeure clause.

In most contracts, establishing force majeure in accordance with the relevant clause will lead to relief from performance either absolutely or for a period of time although the outcomes can vary from contract to contract. Invariably, however, successful reliance on the force majeure clause would then mean the party relying on it avoids the risk of a default which could lead to termination and/or a claim for damages by/from the ‘aggrieved party’.

Frustration

Without a force majeure clause to fall back on, parties might have recourse to the common law doctrine of frustration which provides that a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.

Frustration involves a very high standard to overcome (note the words “impossible” and “radically”) and the courts have confirmed that the circumstances where frustration can be invoked are extremely narrow.

Undoubtedly, frustration will likely be able to be used in certain situations arising from the Coronavirus pandemic but, in many other instances, parties will need to refer to contractual force majeure clauses for help.

Contractual construction

In the absence of a force majeure clause and the ability to turn to the common law doctrine of frustration, one other potential saviour for a party affected by the Coronavirus pandemic may be the specific wording of the contract in question which may offer assistance even when, at first glance, the obligations contained in it appear absolute.

Many well-drafted contracts have less obvious clauses and specific wording that may mean that what appears to be a provision that is contravened as a result of the Coronavirus pandemic would actually not be in particular circumstances due to the specific wording of the clause or the operation of another clause or clauses elsewhere in the contract. As with force majeure clauses, the devil really is in the detail with this particular aid and the exact contractual wording will need to be carefully reviewed to ascertain whether any such wording and/or clauses exist and how they can assist the affected party.

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