Commercial Contracts and COVID-19: how can businesses react?
COVID-19 continues to impact every part of our lives. For businesses subject to commercial agreements, it is presenting real challenges. Meeting contractual obligations such as deadlines and quotas has become extremely difficult in a world of government-imposed shutdowns, staff unavailability, supply chain disruption and changing customer demands.
As a result, many businesses are dusting off their contracts to see how they can react. One clause which is receiving unprecedented attention is the force majeure clause. Often tucked away in the “boilerplate” section at the end of a contract, it rarely comes into play. Here we ask, can this clause protect businesses from the unique challenges presented by COVID-19?
What is force majeure?
The expression usually describes a contractual term which provides that, if a specified event occurs which is beyond the parties’ control, one (or both) parties can:
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cancel the contract;
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not perform its obligations under the contract; or
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suspend performance or claim an extension of time for performance of its obligations under the contract.
Can my business rely on a force majeure clause?
The first thing to check is whether your contract actually contains such a clause. Not all do. If yours doesn’t, then see below.
If your contract does have a force majeure clause, then the particular wording will need to be scrutinised. Not every force majeure clause will be wide enough to cover the implications of COVID-19. If “pandemic” or “disease” is not specifically referred to as a “force majeure event”, then it will be necessary to consider other terms used. “Act of God” is commonly used but it is not clear, at this stage, if it would cover the specific circumstances of COVID-19. Other terms commonly used include “restrictions on import and export”, “failures in supply chain” or “acts of government”. Again, the specific wording will be important. Generally speaking, it is for the party seeking to rely on a force majeure clause to prove that the event in question (in this case COVID-19) falls within the scope of the definition.
Does performance need to be prevented?
Before relying on force majeure, it is important to consider how COVID-19 has affected your business’s ability to perform its obligations under the contract. Has it prevented, hindered or delayed performance? If the force majeure clause requires performance to be prevented before it can be relied upon, you would not be able to rely on it, for example, if performance is simply more difficult or has become unprofitable.
Other factors to consider before relying on force majeure
Businesses should carefully think of the wider implications before claiming force majeure. These will vary from business to business (and contract to contract) but could include:
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Mitigation: some force majeure clauses require parties to mitigate their losses if force majeure is claimed.
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Payment: some contracts might require payment obligations to be suspended during the period of force majeure. This could impact on cash flow.
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Formalities: care needs to be taken to ensure that any notice requirements are complied with otherwise the force majeure claim may not be valid.
What if my contract doesn't have a force majeure clause?
If your contract doesn’t have a force majeure clause (or if the force majeure clause does not cover COVID-19), it might be possible to rely on the common law doctrine of frustration instead.
Frustration allows parties to a contract to be released from their obligations if an event occurs which renders further performance of the contract impossible, illegal or something radically different from what was originally intended. This is, therefore, a more limited and complicated option.
Successful reliance on frustration is very case specific. Whether COVID-19 can be used as a reason to frustrate a contract will depend on a range of factors, such as:
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the nature of the contract
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how COVID-19 has affected the parties to the contract and their ability to perform their obligations under the contract
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whether any COVID-19 related legislation has impacted upon the contract or the parties
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whether COVID-19 has caused a period of delay to the performance of the contract (for example, due to problems securing raw materials) that could not have been contemplated by the parties at the time of contracting.
Dialogue as an alternative?
As the above has shown, claiming force majeure or frustration is a big decision and could have unintended consequences. Before resorting to them then, it might be advantageous to see if the contractual issues could be resolved via dialogue. COVID-19 is unique in that it is affecting all businesses and it may be that both sides would benefit from variation to the original terms of the contract in order to bridge the current (hopefully short-term) challenges. It is important, however, to have any variation properly documented to avoid future disputes (and to comply with the variation requirements contained within the contract).
Thomas Taggart & Sons is following government advice to stay at home in order to protect our staff, families and clients. We are continuing to advise and assist clients, however, by working remotely from home. Should you require any assistance in relation to the issues in this article, or should you wish to have the terms of your contract reviewed to determine if you can claim force majeure or frustration, then please contact us. Keith Dunn can be contacted by email at keith.dunn@thomastaggart.com or by phoning 028 2766 0943.