Impact of coronavirus (COVID-19) on contracts

We have received many calls about termination of contracts as a result of the coronavirus outbreak.  Unforeseen events do not release contracted parties from their obligations in an agreement unless the contract specifically provides for that in a force majeure clause or if the contract is ‘frustrated’.

Force majeure

Most contracts contain a force majeure clause excusing the parties from performance of their obligations if certain events arise.  ‘Force majeure’ translates from French as ‘superior force’ meaning that something significant has occurred meaning obligations in a contract cannot be performed.  To apply, the clause must specifically cover the event that has arisen.  In the case of coronavirus then a contract that has been recently entered into might specifically give the coronavirus outbreak as a reason for termination.  More likely, is that a force majeure clause might refer to government action, travel difficulties, disease or perhaps a more general reference to unforeseen disruption.  A clause must be carefully considered to check whether it applies in the circumstances.

If a force majeure clause does apply then consideration needs to be given as to whether coronavirus is in fact the cause of the inability to perform obligations, how long the clause excuses the parties from their obligations and what obligations the affected party has to try and mitigate its effect.  A contract will normally have an obligation that any notices are given within a particular time after the unforeseen event occurs and in a particular way so the notice provisions in the contract must be checked and complied with.

Frustration

Even if there is no force majeure clause, parties might be discharged from their obligations if the impact of coronavirus makes it physically or commercially impossible to perform the contract, or would render performance radically different from what the parties contemplated when the contract was made.  An example might be if the government introduced a law making it illegal to undertake an obligation in the contract.

Existing contracts

To seek relief from your obligations in a contract, or if you are the recipient of a notice from another party then the terms of the contract and the circumstances surrounding the request need to be carefully considered.  Failure to perform obligations in contracts may impact other contracts and obligations to third parties and the effect on them could be significant.  Before an issue arises we recommend that you review your contracts and seek our advice on where you stand.  It is possible to agree a variation to a contract to address the change in circumstances or to introduce provisions to cater for possible future impact to save unnecessarily drastic action now.

New contracts

For anyone entering into a new contract, consider what possible impact coronavirus might have on your agreement and an appropriate clause should be inserted to address the consequences.

For further advice on how the coronavirus (COVID-19) will affect your commercial contracts, our commercial team are on hand to help. Call 0845 287 0939 or contact us by email at www.farleys.com/contact-us.