2020-03-20
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Coronavirus under the contractual microscope – some potential cures for contract problems

Home / Knowledge base / Coronavirus under the contractual microscope – some potential cures for contract problems

Posted by Justin Byrne on 19 March 2020

Q. I am no longer able to perform my obligations under an existing contract. Can I rely on the Covid-19 outbreak to get out of the contract?

  • A: From an English law perspective, the starting principle is that contractual obligations are absolute, meaning parties are required to perform their obligations and can be liable for breach if they fail to do so. There are, however, three key exceptions to this rule:
    • Force Majeure Clause: Some contracts include a ‘force majeure’ clause which excuses the performance of obligations under the contract if an event happens which is beyond the parties’ contemplation or control.
    • Material Adverse Change Clause: Some contracts include a ‘material adverse change’ clause which may, depending on the wording and interpretation, entitle a party to avoid its performance obligations.
    • Frustration: Where there is no force majeure clause, the law provides potential relief in the form of ‘frustration’. This discharges a party from its obligations if there is a change in circumstances which makes it physically or commercially impossible to perform the contract, or would render performance radically different. This is a high bar and of narrow application. Whether this applied would need to be considered on a case-by-case basis.

Q. Is Covid-19 covered by the force majeure clause in my contract?

  • A:  Force majeure clauses differ so there are various factors to consider on a case-by-case basis, such as:
    • Is Coronavirus covered by the clause?
    • If so, are there elements of conditionality associated with the clause applying and are they present?
    • What notice requirements apply? These would need to be complied with to the extent that you wish to rely on the clause.
    • What is the effect of establishing force majeure?
    • Is it an extension of time?
    • Is it a termination right immediately or after a period of time?
    • Who bears the costs?

It is advisable to seek legal advice on the interpretation of your force majeure clause before taking any action so that you can fully understand the potential risks and the commercial and financial impact on your business.

Q. What should I do if a party is seeking to avoid performance of their obligations under the contract?

  • A: There will be circumstances in which the Coronavirus excuse a party from performance of their obligations; however, this will largely depend upon the wording of the contract.

    It is important that you review the terms of your contract, particularly any force majeure or material adverse changes clause, to be sure of each party’s rights under the contract.  Seek legal advice on their interpretation and the consequences that may follow and consider whether you need to inform your insurers.  It is important that you are clear on your legal position before engaging with the other party.

Q. My supplier is asking to change its contractual obligations because of the impact of Covid-19. Should I agree?

  • A: This is a commercial question for you, but when communicating about the potential impact of the Coronavirus on your respective performance obligations, make sure that you are:
    • clear and fully informed of your legal obligations and rights under the contract
    • no waiver or variation of the terms of the contract is inadvertently agreed
    • the communications are in writing and are clear as to the intended scope and legal consequences
    • proposed variations which you do not agree to are rejected expressly in writing

Seeking legal advice on the content of your communications before sending them is sensible to ensure that your intentions are clear and can be later relied on if necessary.

Q. I am concerned that, due to staffing shortages, I will not be able to fulfil my obligations under the contract. What should I do?

  • A: Carefully review the terms of your contract to see whether there are any clauses which can be relied on to absolve you from performance or protect you against potential breach.  Where problems with performance are anticipated, it is wise to seek to negotiate a variation to the contract quickly and before the default occurs so has to avoid being in breach, which could otherwise have financial and reputational consequences. 

Q. I have a dispute with a customer based outside England and Wales. Which laws will apply to the contract?

  • A: Most contracts will have a ‘choice of law’ which sets out which laws will govern the dispute and a ‘jurisdiction’ clause which identifies the legal system which should determine the dispute.  In the absence of such a clause, a careful legal analysis will need to be carried out to ascertain which jurisdiction is likely to apply, to balance the commercial considerations of location where more than one jurisdiction may apply, and to negotiate agreement with the other parties involved.

Q. Am I covered under my business insurance for losses related to the covid-19 outbreak?

A: Cover will depend entirely upon the wording and interpretation of the insurance contract.  Disputes often arise over the scope of definitions, interpretation of clauses, whether or not events were ‘pre-existing’ prior to inception of the policy, what exclusions have been placed on cover, what loss is covered, and when the outbreak became a notifiable event and whether notice periods have been complied with.

About the author

Justin Byrne

Consultant

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

Justin Byrne

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

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