Coronavirus – What are the contractual implications?

Businesses are naturally considering their options in response to the COVID-19 coronavirus pandemic.

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Coronavirus – What are the contractual implications?

Businesses are naturally considering their options in response to the COVID-19 coronavirus pandemic. Manufacturers and their customers may face staffing shortages, supply chain disruptions, reductions in demand and potential cash flow problems. The unprecedented restrictions imposed by the UK government will affect businesses across the economy, with the retail, hospitality and entertainment sectors particularly impacted in recent days.

Customers who are seeking to to renegotiate contracts using alternative suppliers should be mindful that clauses stipulating minimum terms or orders may limit the scope for such continuity arrangements.

Key legal avenues for businesses whose contracts are affected include force majeure clauses and the legal doctrine of frustration. Parties considering taking such steps should first obtain specialist advice as the implications of wrongly doing so may be significant.

Force majeure

So-called “force majeure” clauses can enable parties to delay or avoid their contractual obligations in specified circumstances. As ever, the language used in each contract is key, and businesses should seek advice on how clauses apply to disruptions resulting from the coronavirus.

Some force majeure clauses helpfully specify that a pandemic is a force majeure event. Alternatively, the coronavirus outbreak may have created events which are themselves specified in the clause, such as a shortage of labour or raw materials. Where UK government restrictions prevent performance, the “political interference” language in some force majeure clauses may apply.

Very general definitions of force majeure events, such as “any cause beyond the control of the parties”, risk being insufficiently clear. At the very least, courts are likely to deem that such wording requires parties to have first tried all reasonable steps to mitigate their losses such as sourcing staff, equipment or materials from elsewhere.

The party seeking to rely on force majeure must establish that the specified event has caused its non-performance of the contract. This is mostly a factual question but, again, much will depend on the exact language of the clause. Clauses occasionally stipulate that the event merely needs to “hinder” or “delay” performance. However, force majeure clauses are rarely so generous that they would assist where services or goods will simply be more expensive to perform or obtain.

It should be noted that some contracts may require parties to give prior warning of anything that might impact on their performance under the contract. Further updates may be required on an ongoing basis.

Frustration

In the absence of a relevant force majeure clause, parties may seek to argue that existing contracts are “frustrated”. The common law doctrine of frustration discharges parties from their contractual obligations if a change in circumstances, which is out of control of the parties, makes it physically or commercially impossible to perform the contract or would render performance radically different.

Courts have continually stressed that this is a high bar; performance must be rendered impossible, not simply more difficult or expensive. Contracts which oblige physical presence or performance may arguably be frustrated by the lockdown by the UK government, depending on the precise circumstances.

If an event was foreseeable by the parties when the contract was formed, this could prevent a party successfully arguing frustration. Arguments regarding whether coronavirus was “relevantly foreseeable” may depend, for example, on whether the coronavirus had already originated or became widespread at the time the contract was formed.

It can be possible for parties to agree time extensions or reduced payments without losing the opportunity to later argue that the contract was frustrated. However, such actions may undermine the notion that the contract was impossible to perform. Such decisions should therefore be taken with the benefit of expert advice.

Depending on the circumstances, it may be that agreements to relax contractual obligations could amount to a legally binding contractual variation or indeed an entirely new contract.

If you would like advice on the contractual implications of the coronavirus pandemic, please contact Michael Peacock on 0114 290 6287 or at michael.peacock@keebles.com.

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