The Coronavirus - is your business protected?
We look at the potential commercial impact of the virus.
Over the last week there has been an increased awareness and coverage of the impact Coronavirus is having, with the first cases being reported in England. We are hearing more and more about the precautions we should be taking to protect ourselves from the virus but it is important to be aware that the ramifications of the virus are not restricted to health. Companies such as Apple, Toyota, Hyundai and many more are beginning to suffer commercial impacts as a result of the virus. With reduced staff and restrictions on transportation, as a virus such as this spreads, disruption to supply chains follows. It is essential that businesses consider if, and to what extent, they are protected in the event that they become unable to comply with contractual obligations due to supply chain failures originating from the virus.
Force majeure clauses
English common law provides few remedies in the event that a business, due to circumstances outside its control, is unable to perform its obligations under a contract. It is therefore common practice for an express force majeure (French for “superior force”) clause to be drafted into contracts. “Force majeure” does not have a generally accepted definition in English law. The cover offered by a force majeure clause therefore comes down to the specific drafting agreed between the parties in the contract and the interpretation of such drafting by the courts.
Are you protected?
The first point to consider when assessing the protection offered by a contract is how the circumstances have impacted fulfilment of the contracting parties’ obligations. Are obligations impacted in a way that allows the force majeure clause to be applied? For example, does the clause require it to be physically and commercially impossible for the business to carry out its obligations? Alternatively, does the clause have a lower threshold, applying if the circumstances delay a party’s ability to fulfil its obligations?
The event impacting performance of obligations should then be considered. Force majeure clauses tend to specify particular events or circumstances in which the clause will apply, for example acts of God, epidemic/pandemics, lockouts or government action. The inclusion of examples is desirable and proves beneficial in establishing protection if a listed event occurs. In considering your business’s protection, this list is the place to start.
Although desirable, it would be impossible to predict and list all potential events beyond the control of a party that may prevent fulfilment of contractual obligations in the future. Listed examples are therefore commonly drafted to be non-exhaustive with a “sweep-up” to cover circumstances not expressly listed in the clauses, such as “any other cause beyond the Seller’s control.” Despite the inclusion of a “sweep-up,” rules of construction (applicable at the discretion of the court), allow interpretation of a sweep-up in light of the preceding listed events. If the current circumstances are not remotely similar to the examples provided, the event may not be covered by the force majeure clause.
When relying on a force majeure clause, you are relying on the fact that the event caused the impact on your obligations. Once you have established that the impact on obligations and the event are covered by the clause you should consider whether, if disputed, you are able to demonstrate that the event caused the impact on your obligations.
To what extent are you protected?
The remedies available if a force majeure event occurs will depend on the specific drafting of the contract in question. Standard force majeure clauses tend to:
- suspend obligations affected by the force majeure event whilst the force majeure event is ongoing with reactivation of obligations on conclusion of the force majeure event;
- allow for either party to terminate the contract if a suspension is ongoing for a certain period;
- allow a liability free period for the parties in relation to their failure to perform the affected obligations under the contract; and/or
- require the parties to mitigate the impacts of the force majeure event.
Before seeking to rely on force majeure protection, you should check procedural requirements in the contract that must be satisfied to activate force majeure remedies such as the procedure for notification to the other party of a force majeure event.
Force majeure clauses are not the only possible contractual protection in the event of a pandemic. The common law doctrine of frustration may apply if, after the formation of the contract, a serious event occurs beyond the control of the parties which renders it impossible (physically or commercially) to fulfil the contract or transforms the obligations of a party into radically different obligations. If possible, this doctrine should be a fall back option for protection. The standard required to satisfy this doctrine is a lot higher than that of force majeure clauses commonly drafted and, if the court is satisfied that a contract is frustrated, the contract is automatically discharged. This may not be a desirable outcome in circumstances where service may resume in the future.
How we can help
If, on review of your contracts, it is unclear if the impact of Coronavirus will be covered by a force majeure clause, the risk to your business of relying on the clause and alternative options should be considered carefully. As viruses continue to spread and impact on the supply chain continues to grow, you should consider how force majeure clauses in current and future contracts can be tightened to offer as much protection for your business as possible.
For more information on the issues raised in this update, please contact Gemma Fairbrother, Solicitor on 0113 213 4018 or email firstname.lastname@example.org, or Victoria Robertson, Partner on 0113 213 4107 or email email@example.com.