The continued spread of coronavirus is causing global disruption to trade and commerce as the impact of lock-downs, quarantines, suspended travel and cancelled public events ripples across the business sector.
In real terms, businesses are already feeling the effects of employee shortages, work-place closures and disrupted supply chains. Against this background, there are numerous questions arising about businesses’ contractual obligations and, in particular, whether coronavirus will constitute a force majeure event.
What is force majeure?
Where contractual obligations are made legally or physically impossible, force majeure clauses may be triggered. Common examples of defined force majeure events are wars, strikes, natural disasters and government actions. The force majeure clause in commercial contracts enables parties to take a break from, or be absolved of their performance obligations.
Whether disruptive events linked to coronavirus constitute a force majeure event will depend on the drafting and interpretation of the relevant contract. Unfortunately, there is no uniform rule for all and each contract must be considered on a case by case basis.
Your force majeure checklist
Whether it is your business triggering force majeure or the other party, it is important to consider:
- Your existing contracts – to see how your contractual obligations may be affected and whether force majeure is a factor. Does the force majeure clause specifically refer to diseases or epidemics?
- The risks of non-performance – are there other means of effecting performance? Force majeure will not be triggered if it is simply more expensive or difficult to carry out your obligations.
- Mitigating the impact – consider how your business can mitigate the effect of the disruption on contractual performance.
- International contracts – will your agreements be effected by the state of affairs in other countries? Interestingly, China has been issuing an unprecedented number of force majeure certificates to help protect companies from legal disputes arising from the spread of coronavirus.
2. Notification and communication
- Review your contractual notice requirements and notify other parties as soon as possible if your ability to carry out contractual obligations is affected.
- Engage in discussions with the other party – you may be able to reach a mutually agreeable solution by negotiating extended time limits, rights to terminate etc.
- If it is the other party who is failing to comply with their obligations, discuss what their action plan is and how you will both proceed.
- Document the steps your business has taken to mitigate the impact of the disruption.
- Collate evidence of strategic decisions made in relation to the disruptive events as this will help in the event of a dispute.
4. Entering into new contracts
In light of the present disruption, consider drafting force majeure clauses to include the risks posed by epidemics of this kind i.e. quarantines, border-closure, travel restrictions, lockdowns, and port-closures.
Make sure drafting is clear and the risk of non-performance is fairly allocated.
Consider whether your insurance cover applies. Your insurer may require notice within a specific time frame, a duty to mitigate loss and a requirement to consult with them before taking action.
In the absence of a force majeure clause
The common law doctrine of frustration may apply in the absence of a force majeure clause. This is a very narrowly construed doctrine and will only apply where the contractual obligations are essentially impossible to perform.
This narrow definition may be reached in some situations arising from coronavirus, for example, where the contractual obligations are to be carried out in a region that is subject to a state-imposed lockdown.