Covid-19 and Contractual Arrangements

Businesses are concerned about the potential impact of Covid-19 on contractual arrangements that they have in place with suppliers and consumers, particularly where the performance of the contract is affected. What happens if COVID-19 affects a party’s ability to perform its obligations under a contract? What is force majeure and can your business rely on it? What if your terms and condition do not contain a force majeure clause?

What is force majeure?

Force majeure is a term used to describe circumstances beyond the reasonable control of a party to a contract.

To rely on force majeure the contract must include a force majeure clause.

A force majeure clause can alter a party’s contractual obligations/liabilities if a party is unable to perform its obligation under the contract because of an event outside the party’s control.

A party can only rely on force majeure if that party is prevented from performing its obligations under the contract. 

What events are covered?

There is no specific definition of a force majeure event and this can lead to disagreements about whether an event falls within the scope of force majeure.

Force majeure clauses usually list a number of specific events like adverse weather, war, riot, embargoes, government interference, an Act of God and may include general wording like “circumstances beyond a party’s reasonable control” to cover situations which may not fall neatly within one of the specific events listed.   

Whether the event – in this case, the Covid-19 outbreak -constitutes a force majeure event will largely depend on the specific wording of the relevant clause.

Businesses should review their contracts to see (a) whether there is a force majeure clause and (b) whether the clause specifically covers epidemic/pandemics, in which case, subject to reviewing the specific clause, it is likely that Covid-19 would be a force majeure event. Alternatively consider whether Covid-19 may fall within any other definitions of a force majeure event within the contract such as government interference, acts of God or in any other catch-all provision. 

Contractual effects of force majeure

A force majeure clause may allow a party to delay or terminate the contract.

Relying on force majeure clauses

It is for the party seeking to rely on the force majeure clause to prove that the event -in this case, Covid-19- falls within the force majeure clause and that non-performance of the contract was due to that event.

There are often procedural requirements within the contract for parties wishing to rely upon a force majeure clause. For example, it is common for the affected party to have to give notice to the unaffected party.  It is important that contracts are reviewed to ensure that compliance with such contractual provisions. 

What if the contract does not have a force majeure clause?

Written contracts may not include force majeure provisions. Not all contracts are in writing. Where there is no specific force majeure clause it may be possible to rely on the common law doctrine of frustration.   

Frustration

A contract is frustrated if an event outside of the control of a party makes the performance of the contract impossible. If a contract is frustrated the affected party is excused from its obligations under the contract and will not be liable for non-performance.

For the contract to be frustrated, the event must (a) happen after the contract comes into effect (b) be beyond what was reasonably contemplated by the parties when they entered the contract (c) not be due to the fault of either party, and (d) must make the performance of the contract impossible, illegal or radically different.  

Frustration is permanent and brings the contract to an end rather than causing it to be suspended. The common law will not apply where performance is simply delayed, rather than becoming impossible.

The bar for establishing frustration is high and the courts apply the doctrine narrowly. Given the scale of the Covid-19 outbreak, it may constitute frustration - but this would depend on the specific circumstances and the impact on the contract.  

Whether frustration (or any other basis for terminating contractual obligations) can be established depends on the terms of your agreement and the effect upon the specific obligations (of both you and other parties). The options available under the agreement should be considered carefully before action is taken to minimise potential liability for wrongful termination of the contract.

What should you do?

Businesses should:

1. Review their key contracts and arrangements 
2. Review the terms of any force majeure clauses
3. Consider any other relevant clauses such as change control, variation, material adverse change, limitation of liability, termination, dispute resolution
4. Review their insurance arrangements

For further information please contact one of our local offices below.

• Swansea: 01792 773773
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• Carmarthen: 01267 234022
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• Cowbridge: 01446 771742
• Haverfordwest: 01437 764723
• Fishguard: 01348 873671

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