Commercial Contracts, Force Majeure and the Coronavirus

Category: Dispute Resolution, News

The Government is doing all it can at present to ensure the population is being kept safe from the effects of Coronavirus. It is therefore of utmost importance that the latest Government guidelines and recommendations are being followed, prior to any further commercial considerations. One particular term that we will see used more and more in the coming weeks is Force Majeure. But what exactly does it mean?

It is completely understandable that we are all concerned about the health effects of Coronavirus. The widespread commercial effects of it can also no longer be ignored, and we are already receiving enquiries from clients concerned about how the pandemic is affecting their commercial relationships, which is putting them at risk of getting into a dispute.

A comprehensive analysis of the commercial effects of the pandemic is of course well beyond the scope of this article. Instead, we set out below some issues that have arisen, which you may wish to consider, if Coronavirus has impacted commercial relations you have with another contracting party.

Financial Distress

Does your contract include a ‘force majeure’ clause?

It may be worth checking first of all if there is a force majeure clause written into the contract. Force majeure clauses cover several circumstances where a party may be excused from non-performance, should any one of them arise.

As the name suggests, force majeure is not a concept originating in English law. For that reason, in order for a party to rely on it, the contract will need an express force majeure clause within it. The Court will not imply a clause in there for you if there isn’t one, since force majeure will not be recognised by the Court if it is not defined. Likewise, if the contract simply states something like, “the usual force majeure clause shall apply”, this will not work either. The clause will need to list specific examples of what the parties contemplate will be a force majeure event, if a party is seeking to rely on it to excuse them from non-compliance with the contract.

Typical examples of force majeure include: natural disasters (or “Acts of God”), fire, terrorism, civil unrest, industrial action – and pandemics. A party could therefore potentially rely on the fact that pandemics are actually named as a force majeure event in the clause.

If the clause is a bit overly-specific, for example it states “influenza pandemic,” then the Court may be able to use its discretion to widen its interpretation to include all pandemics, not just one type of them.

Lastly, it should just be added that the force majeure event should have specifically prevented compliance – it will not assist if it has nothing to do with reason the contract was not complied with!

Frustrated?

In the likely event that there is no force majeure clause in the contract (or there is one, but it’s of no use), you should consider whether the contract could be ‘frustrated’. Although it certainly can be frustrating being stuck indoors during a pandemic, the word here has a specific legal meaning!

Frustration is where an event occurs, after the contract is concluded, which makes performance of it physically or commercially impossible. The emphasis here really should be on the word “impossible”– the contract will not be said to have been frustrated if Coronavirus has simply made the commercial environment particularly tough to work within. Fluctuations in the economy or property markets have been held by Courts to not amount to frustration. A severe drop-off in business may not technically have made it impossible for the contract to be undertaken, even if it has made it very, very difficult!

However, it may be useful to know that examples of frustration have included emergency changes in the law, the introduction of which has meant performance of the contract becomes effectively illegal. With government policy changing pretty much daily due to Coronavirus, and controls on the population becoming ever-more stringent, this could lead to the contract being frustrated.

Whether falling ill or being kept in isolation amount to frustrating events will very much depend on the contract and the background facts. 

Debtors and Creditors

We can assist you

As the coronavirus situation develops, we fully expect to see an increase in the number of enquiries we receive from concerned commercial clients. Parties to a dispute should approach the situation rationally and commercially, seeking to work together where possible in what are demanding times. However, we also appreciate that this is a complex area where professional advice may be required.

If you have an enquiry regarding the above, please do get in touch with our Commercial Dispute Resolution team to see how we can assist. Either call us on 01752 827120 or email [email protected]

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