COVID-19 – The Impact on Commercial Contracts

The myriad and rapidly evolving impacts of COVID-19 are being felt throughout the globe, and have been since it first emerged in China at the end of 2019. As we take measures to protect against the public health issues that Coronavirus poses, its outbreak has already led to significant economic disruption –  in the healthcare system, employment, politics and the economy.

Contractual commitments are being scrutinised and ‘force majeure’ is becoming a hot topic.

Force majeure – what does it mean?

Force majeure is a legal concept derived from French law and means ‘superior force.’ It is a common clause found in commercial contracts which:

  1. excuses parties to a contract from performing their obligations under the contract; and/or
  2. allows a party to suspend their obligations under the contract, due to unforeseen difficulties out of their control or foreseen problems that are likely to occur, but the nature or extent cannot be foreseen.

Natural disasters, wars, riots, revolutions, explosions, strikes, and government actions can all be force majeure events.

So is the Coronavirus an unforeseen event?

It is not a certainty that the outbreak of coronavirus, or the resulting government restrictions, will be regarded as a force majeure. This is still very much up for debate. Whilst recent past has seen many epidemics in the form of various flu outbreaks which have not been defined as such, few would dispute the fact that Coronavirus has triggered panic, lockdowns and disruption on a scale incomparable its predecessors. Pair this with the WHO’s declaration that this outbreak is a global health emergency and the description of it as a pandemic, the courts may be likely to judge this event as “unforeseeable”.

Further supporting this argument, the China Council for the Promotion of International Trade has offered to provide force majeure certificates to businesses who apply and can prove that they have been unable to fulfil their contractual obligations due to the outbreak. These certificates, although not binding on the courts or on the contracting parties, would go a long way, both in court and in negotiations with the other party, to successfully invoke a force majeure clause.

What if there is no contract in place?

Although we would strongly advise that parties seek legal advice and draw up written contracts when transacting with one another, we do understand that deadlines, arrangements and other pressures mean that on occasion this is not practical or possible.

If you have a short-form contract which doesn’t include force majeure protection, or you have a simple oral contract, and you are unable to fulfil any contractual obligations because of the outbreak, the English law doctrine of frustration may be of assistance.

Where a party cannot fulfil its contractual obligations because of the Coronavirus outbreak, in the absence of a force majeure provision, the contract is said to be “frustrated”, i.e. it cannot operate. This can deliver a similar outcome to the force majeure clause.

Given the current uncertainty and global reach of the outbreak, what should you be doing?

  • A review of all contracts connected to any of the industries or countries affected by the Coronavirus should be undertaken to ensure that the contract includes a force majeure clause. As set out above, force majeure is not a legal presumption.
  • Ensure a detailed evaluation of the force majeure clause is undertaken.
  • Adherence to any notification requirements or obligations under the contract is very important.
  • Assess what measures, if any, can be undertaken to mitigate the effects of the event.

We have extensive experience of reviewing and advising corporate and commercial contracts and welcome a telephone call or email query , in particular, if you are feeling the impact of Coronavirus and have any uncertainty as to your legal obligations within any contract.

Please contact Roger Margand Corporate & Commercial team (E: T: 01603 677025) for more information.