Coronavirus: The Legal Implications for Commercial Contracts
Please note – you can listen to this update as a podcast episode by clicking on the podcast image at the bottom of this article.
We’re seeing a number of business affected by the Coronavirus as it continues to spread across the world. Supply chains are being affected as manufacturing in key markets such as China slows and travel restrictions are imposed. In this article, Commercial Partner, Rachelle Sellek looks at some of the legal issues in English and Welsh law that may impact normal business relations between a customer and a supplier.
The first contractual principle to consider is whether the Coronavirus epidemic amounts to a force majeure event and if the contract makes provision for it. Force majeure is generally defined as an exceptional event outside the reasonable control of a party that hinders or prevents the performance of an obligation by that party.
English and Welsh law does not recognise the right of a party to be released from its contractual obligations as a result of a force majeure event. Instead, the right only arises if the parties have included an express term to that effect. Even if there is an express term in the contract, the circumstances of each individual case require careful consideration to ascertain whether a force majeure event has actually occurred.
If you are a supplier and cannot comply with the contractual commitments you have made, whether in terms of supplying the right quantity of committed goods, delivering to the agreed location or being prevented from providing services because you cannot get on-site, a review of your contracts would be advised to determined whether you can rely on a force majeure clause to avoid being in breach of contract.
On the flip side, if you are a customer and your supplier is citing the virus as a reason for being unable to provide contracted goods or services you need to know if your supplier is in breach of contract or has the benefit of a force majeure clause to relieve them from liability.
Of course, a force majeure clause (or lack of one) is not going to be able to help get goods and services delivered, but it may help give a legal remedy.
The other point to consider when looking at the availability of a force majeure clause to give relief from liability, is that they are almost always time limited and a prolonged delay beyond the specified period may entitle termination. Or, to put it another way, if a party is looking for an opportunity to get out of a contract without risk, Coronavirus and force majeure might provide the answer. As with all these issues, careful consideration of the contractual terms in all the circumstances is essential.
Force majeure is the most likely legal term that is going to relieve a party from liability and perhaps enable a contract to be terminated. However, there are others that can be considered depending on the circumstances.
A contract may be terminated on the grounds that it has been frustrated if it becomes physically or commercially impossible to perform as a result of a frustrating event. If a frustrating event occurs, the parties are no longer bound to perform their contractual obligations.
However, in reality frustration is difficult to establish and therefore unusual in practice. Whether or not a frustrating event has occurred will depend on the precise circumstances including, what was contemplated by the parties at the time they entered into the contract, the precise construction of the contractual obligations, the nature of the supposedly frustrating event and the parties’ respective ability to deal with it.
Given the rapid and unpredictable spread of Coronavirus, it is impossible to say how long and to what extent businesses will be affected. It seems safe to say that there will be an impact and it will be necessary for businesses to monitor developments including their rights and obligations under their contracts.
If you want any further information or to have a legal review of any of your contracts please get in touch with Rachelle Sellek in our Commercial team.
To listen to our update as a podcast episode, please click here.