Covid-19, better known as the Coronavirus, has been headlining the news for weeks. With the epidemic worsening, businesses now fear how this will impact their contractual obligations. Normally, the law obliges businesses to continue with their performance obligations absolute. However, if the operation of force majeure comes into play or the contractual agreement is frustrated then the games changes… Does your contract contain a force majeure clause? Is it difficult to perform your contractual obligations resulting in business standstill? If so, the below will provide you with guidance on how to resolve, avoid and mitigate the commercial turmoil that Covid19 has brought with it.
What is force majeure?
If a contract contains a force majeure clause, it will normally deal with what happens when parties are unable to perform their contractual duties due to an external event that neither party is able to control. A force majeure clause therefore suspends the party’s obligations. A force majeure clause would normally look like this:
‘force majeure event means any circumstance not within a party’s reasonable control including, without limitation (a) acts of God (b) epidemic or pandemic (c) terrorist attack, riots or war (d) nuclear, chemical or biological contamination (d) law or any action taken by a government or public authority’
To establish whether the Covid19 epidemic is covered by your force majeure clause, is dependant on the extent of the clause. If Covid19 is not specified as a force majeure event, then it may fall under another category, this can include action taken by the government of public authority preventing the performance of your contractual obligations – wording that is normally included as a force majeure.
However, even if is included there may be other considerations before ending your contractual obligations such as:
- Are there alternative ways to perform the requisite obligations e.g. alternative suppliers, delivery, product or service?
- Can the service or product be suspended?
- Can parties agree bilateral alternate variations to the contract?
- Are there alternative resources to delivering the service or product?
- Has the force majeure event prevented or hindered it from performance of the contract?
- Have the parties taken reasonable steps to mitigate or avoid the effects of force majeure?
- The financial consequences of triggering false majeure?
- Are there any compensatory requirements when executing the false majeure clause?
What is frustration?
If your contract does not contain a force majeure clause, then you may have recourse to the common law doctrine of frustration. Frustration acts as a device to set aside contracts when an unforeseen event renders the party’s contractual obligations impossible or changes. However, relying on this is not as straightforward as disputes may arise
Are you covered?
It goes without being said that the termination of a contractual agreement may result in pecuniary loss. To mitigate financial loss, it is advisable that you review your insurance policy to determine whether you are covered for events such as the Covid19 epidemic.
Business interruption policies may cover you for financial loss or can help you with bespoke contingency plans. For those who operate service and product-based businesses an interruption policy may help you in the event of cancellation, abandonment, postponement or interruption of particular events.
- Read! Read through your contracts carefully – do they have a force majeure clause which you can rely on?
- Alternatives! Find alternative ways in which you can perform your contractual obligations i.e. renegotiate terms, delay, reschedule…
- Communicate! You should notify the parties of any delays, termination, suspension and frustration that may occur
- Mitigate losses! If there are alternative ways in which you can provide the service/product then use it. Don’t rely on force majeure or frustration as the easy way out.
- Plan! Create a contingency plan for the future – ensure potential clients and customers are aware that you have alternative mechanisms to operate your business. Do not leave them in the dark and ensure you communicate with them.