The Impact of Coronavirus on Your Contracts
18th March, 2020
The global spread of COVID-19 / Coronavirus is understandably dominating the headlines.
Alongside the public health issues there is growing concern about the impact of the outbreak on the economy.
It is important for businesses to ensure that they review and understand their contracts with their suppliers and customers and are aware of the legal issues which may arise should they (or another party) be unable to fulfil their contractual obligations.
Generally, if one party can’t (or won’t) fulfil its obligations and another party suffers a financial loss, a claim for damages for breach of contract would be a possible remedy. However, this will depend on the terms of the contract and certain terms may become relevant in exceptional circumstances such as the Coronavirus outbreak.
Two examples of contractual terms which may be relevant are force majeure clauses and limitation clauses. In addition, the law relating to frustration of contracts may be relevant.
A force majeure clause typically excuses one or both parties to a contract from performance of their contractual obligations following the occurrence of certain events which are outside a party’s control.
The effect of a force majeure clause will depend on how it is drafted. Often, the obligations will not fall away but will be suspended for the duration of the relevant event and the non-performing party will not be liable for non-performance for the duration of the event.
As an example in the context of Coronavirus, a scenario could arise where the government imposes travel bans. This would impact supply chains, particularly for manufacturers operating a just in time system. If goods don’t arrive because of a travel ban then the production line could stop, causing loss of revenue and profit and putting the manufacturer in breach of its obligations to its customers. However, if there are force majeure clauses in place both the transport company and the manufacturer might be relieved of liability.
It is common for contracts to include clauses which seek to limit the liability or one or both parties for losses arising from a breach of contract. The clause may cap the liability of a party to a certain figure or limit liability for certain types of losses, such as consequential or indirect loss.
Limitation clauses can vary significantly in their wording and should be carefully reviewed in order to establish their effect, especially in exceptional circumstances arising from situations such as the Coronavirus outbreak.
For example, a limitation clause could expressly exclude liability for losses arising from events beyond a party’s control.
The legal doctrine of frustration may also apply in circumstances where an event occurs after formation of the contract which is not the fault of either party and makes performance physically or commercially impossible, or renders the performance that is possible radically different from what was envisaged.
For example, a frustrating event could arise where a change in the law makes performance of a contract illegal. As per the above example, if the government were to impose travel restrictions, it may be illegal for a party to transport goods, or hold a conference, regardless of their contractual obligations to do so.
It is important to note that if a contract has been frustrated, it is brought to an end at that point and both parties are released from their future obligations. If the event or circumstances which have frustrated the contract come to an end and the parties wish to resume their arrangement, they will need to enter into a new contract.
If you anticipate that an event will occur in future which will make it impossible to perform your obligations, it is advisable to wait for the event to occur before taking any steps to treat the contract as at an end. If you take any action before the frustrating event you may be acting in breach of contract and open to a claim for damages, whereas if you wait for a frustrating event to occur before taking any further steps you may avoid liability. This requires legal advice because whether waiting is an appropriate course of action depends on what increase in liability will occur, if any, if you wait and a frustrating event does not occur.
In summary, it is advisable to review and consider your position as early as possible if you are concerned about the impact Coronavirus may have on your business. If you have any concerns with contracts you have entered into, we can advise as to your position and what you should do.
Dispute Resolution and Insolvency
Senior Partner and Head of Team
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