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As the global fallout of the coronavirus escalates, we examine its disruptive impact on contractual arrangements throughout your supply chain. Two legal principles – force majeure and frustration – can help you manage risk associated with disruptive events.
While the full extent of the coronavirus outbreak remains to be seen, its economic impact has already sent shockwaves across the globe. This article will help you to prepare for disruption – whether you’re buying or selling as a local authority, housing or care provider, or a charitable, educational or commercial organisation.
Notwithstanding governmental advice and monetary relief measures, stock markets and commodity prices have fluctuated sharply in a rush of panic. With logistical disruptions and rising prices, either you or your trading partners may now find it difficult (or impossible) to perform existing contractual obligations on time (or at all). For buyers and sellers of goods and services alike, this can trigger a “domino” effect up and down the supply chain, which will require proactive risk assessment and action.
Will force majeure clauses protect against contract claims?
“Force majeure” clauses are incorporated in a contract to relieve or delay or vary their performance obligations.
We set out below important considerations when relying on force majeure clauses:
1. Does the contract contain a force majeure clause?
In English Law, there is no implied application of force majeure. A party to a contract governed by English law will only be able to claim force majeure if there is an explicit clause in the contract. Whether this covers the coronavirus outbreak depends on the actual wording of the contract. Where there is no force majeure clause, we explore below the alternative avenue of arguing contractual frustration.
2. Does the force majeure clause cover coronavirus?
Some clauses exhaustively list force majeure events. While such clauses may not explicitly cover the coronavirus outbreak, they may be caught indirectly by reference to government restrictions such as the prohibition of travel and public meetings.
Other clauses may contain a “catch-all” provision such as “any event beyond the reasonable control of the parties”. Whether coronavirus is caught by this type of clause depends on the impact on the relevant party’s ability to perform the contract.
The courts will enforce force majeure clauses in accordance with their literal meaning. However, the courts have invalidated clauses that simply refer to “force majeure conditions” because they are too uncertain.
3. Does the impact of coronavirus meet the force majeure threshold?
This depends on whether the impact on the parties to perform the contract meets the threshold set out in the force majeure clause:
- where the clause requires the force-majeure event to “prevent” performance of the contract – you must prove performance is impossible.
- where the clause refers to “hindering”, “impairing”, or “delaying” performance – you must prove performance of the contract will be significantly more onerous.
4. Are there any exclusions to claiming force majeure?
The courts will imply terms that the party claiming force majeure is responsible for taking all reasonable steps to mitigate its ability to perform the contract. The courts may not allow a claim unless the affected party would have been ready, willing, and able to perform - but for the force majeure event. If, therefore, there are failures elsewhere in your supply chain but the contract may be performed at an additional expense, reliance on force majeure may be difficult.
It is also common for some force majeure clauses to define a list of excluded events which would not trigger force majeure – or exclude the remedies available.
A party may not be able to claim force majeure for events attributable to their own negligence or default.
5. Does the force majeure clause contain procedural requirements?
Force majeure clauses may prescribe procedures for the affected party to follow, such as giving the other party notice of the occurrence of force majeure within a deadline. It is vital that these provisions are followed, as non-compliance can invalidate reliance on the clause.
6. What are the remedies available?
The remedies available will depend on the wording and interpretation of the force majeure clause and may include:
- varying the contract or delaying performance;
- suspending the contract;
- terminating the contract; or
- other prescribed procedures as set out in the clause.
Frustration – the alternative
Given the interconnectedness of supply chains, disruption to one trading partner may subsequently impact on your obligations to other trading partners up and down the supply chain. If you cannot rely on force majeure clauses, you may be able to rely on the principle of frustration.
The hurdle for claiming frustration is high: you must prove the contract is automatically discharged because an event after formation of the contract has made it impossible to perform a fundamental obligation; or if the fundamental obligation has become radically different to what was originally agreed. Frustration will not generally apply where:
- alternative steps could have been taken to sustain the contract;
- where performance of the obligation simply became more expensive;
- where you are selling goods under a contract but is let down by your own supplier (as you take the risk of your supplier's failure to perform)
- where the event was foreseeable to the parties at the time of contract or if the contract contained express provisions anticipating the event;
However, the courts have held a contract has been frustrated where:
- performance of the contract would be illegal – for example, an export ban during wartimes.
- the event was abnormal and could not have been contemplated at the time of contract – for example, strike action, or cancellation of King Edward VII’s coronation due to his illness.
Given the legal complexity surrounding events of force majeure, frustration and their novel application to the coronavirus outbreak, we recommend that you take early action to protect your organisation from the risks arising:
- identify the key contracts and where risks lie on both the purchase and supply side;
- review the wording and requirements of each force majeure clause – considering the issues above;
- engage in dialogue with affected customers and suppliers to seek flexibility and mitigate any impact – especially considering reputational and relational risks with long-term trading partners;
- review insurance terms and conditions such as the extent of cover and especially for business interruption; and
- consider any “domino” effects from terminating a contract - when you are dealing with other customers and suppliers above and below you in the supply chain and any obligations you may owe them.
Again, please note the complexity involved in this area of law and its unprecedented application to the coronavirus outbreak. We strongly recommend that you seek legal advice if you have concerns about the impact.
For more information
For further detailed advice on force majeure claims and commercial contracts generally, please contact Emma Watt.
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