Coronavirus – How It Impacts Business Contracts

The outbreak of the coronavirus has had far reaching implications for a variety of people and companies nationally and worldwide. Many businesses have felt the impact of the virus with many having to cease operations and/or find different working methods (e.g. employees working from home).

The impact of the virus has also meant that businesses are having to consider their contractual obligations with other organisations and their clients.

Coronavirus and business contracts

Under English law, businesses whose commercial operations are affected by the coronavirus and have on-going contracts are still obligated to perform the relevant business operations and may be liable if they fail to do so.

However, there are two general exceptions in English law which are relevant to the current circumstances and may excuse a party from undertaking their commercial obligations.

Force majeure clause

A force majeure clause in a contract, if included, can potentially relieve a party from their contractual obligations in circumstances which are not under their control. Alternatively, it may alter their obligations within the commercial agreement.

With regards to the coronavirus, a force majeure clause can be used by a party only when the virus is specifically stated in the agreement or if it falls under some general wording in the contract.

The party who is looking to enforce the clause must be able to adequately show that an event – e.g. the coronavirus – has prevented them from undertaking their obligations in a contract. The party must, however, have taken reasonable steps to avoid or work around the effects of the force majeure event, making their best efforts to undertake their contractual obligations, and be able to supply evidence of this.

Frustration

The other exception under English law is the doctrine of frustration which, if successfully argued, may set aside commercial agreements due to unforeseen events which renders contractual obligations impossible, or drastically impacts the party’s main purpose outlined in the agreement. It may be relied upon by a party when there is no force majeure clause stated in a contract.

Review your business contracts

If your business has been impacted by the coronavirus, it is important to review the terms of your contracts to see if there is a force majeure clause and if, in the circumstances, it may be relied upon. This will depend on the wording of the clause. The contract should also set out the effects of invoking the clause. As mentioned above, a force majeure clause may allow businesses to suspend or terminate the obligations of a contract.

If there is not an express force majeure term in the contract, under English law, it will not be implied into it. This is a good time for businesses to review contracts/standard terms and conditions to consider specifically including the coronavirus as a qualifying event for invoking a force majeure clause going forward.

If there isn’t an express force majeure clause, the business may be able to rely on the doctrine of frustration, as outlined above. However, there is a very high threshold to get over in order to successfully argue frustration and each case must be looked at on its own set of facts. Whether Covid-19 will be a frustrating event, it must be considered whether it renders performance impossible, illegal or radically different from what was originally contemplated by the parties. What usually makes the claims unsuccessful is if it argued that it is uneconomical or more onerous to fulfil the contracts.