Coronavirus impact on performance of commercial contracts
The risk and spread of coronavirus have raised serious concerns for businesses and their performance obligations under commercial contracts following the outbreak earlier this year.
The starting place for considering the impact of coronavirus on the performance of commercial contracts depends on whether the contract has a specific provision that captures the outbreak and its effects.
Force majeure is a contractual term which typically excuses a party from performance of the contract following a certain event which is beyond the reasonable control of that party and has hindered or made performance impossible. The underlying principle of force majeure is that where such an event occurs, that party will not be liable for its failure to perform its contractual obligations.
Although not all contracts use the term ‘force majeure’, relevant clauses typically contain three main features:
- a definition of force majeure events;
- notification and other formalities if such an event occurs; and
- the consequences of a force majeure event occurring.
The term ‘force majeure’ derives from French law and as such has no recognised meaning in English law; its scope varies from contract to contract. Whether coronavirus is a force majeure event will depend on the particular wording of the clause.
If no reference is made to a disease or an epidemic, parties may still be able to rely on catch all terms such as “circumstances beyond the parties control” if that party has taken all reasonable steps to mitigate its consequences.
If a force majeure event can be identified, the remedy will also depend on how the clause is drafted but will generally determine whether the contract continues, is suspended or is terminated:
- Suspension: contractual obligations are suspended while the force majeure event is occurring. When the event comes to an end, the obligations are re-activated.
- Non-liability: the non-performing party’s liabilities for non-performance or delay is removed.
- Obligation to mitigate: the affected party must take all possible steps to avoid the event or its consequences.
- Right to terminate: if the force majeure event continues, either or both party may have the right to serve notice terminating the contract.
If your contract does not include a force majeure clause, you may be able to rely on the common law doctrine of frustration. Frustration applies where a supervening event renders the performance of a contract radically different from the obligations originally undertaken. However, its application is narrow in scope and will not apply where the contract has a force majeure clause.
Parties affected by the coronavirus outbreak should:
- review force majeure provisions together with any notice requirements;
- consider amending standard terms of business to cover pandemics or crisis events;
- consider making alternate arrangements; and
- take legal advice.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you would like more information on a particular contract or corporate matters please contact Lydia Mills at firstname.lastname@example.org.