How are Your Existing Commercial Agreements Going to Be Affected by Covid-19?

23rd March 2020 by

If you are concerned about the enforceability of your business agreements in light of the Covid-19 outbreak then you need to take a close look at the terms of your commercial contracts.

Covid-19 has been defined by the World Health Organisation [WHO] as a pandemic and as such, it is likely to be a “force majeure” event, as defined in a standard “force majeure” clause in a commercial contract.

The term “force majeure” comes from the French civil law term meaning “superior force” and whilst it doesn’t have a defined meaning in English law, it is understood to refer to an event which is beyond the control of the parties to the contract and makes the performance of the contract difficult or impossible.

A clause in the contact will say that a force majeure event is: any circumstance not within the parties’ reasonable control including: –

(i) Acts of God such as floods, drought, earthquake or any other natural disaster
(ii) An epidemic or pandemic
(iii) A terrorist attack, civil war and riots

You need to look at the contracts with your suppliers and purchasers and work out if you have one of these clauses. If you are looking to avoid the contract then the inclusion of this type of clause is a good starting point, but it doesn’t mean that you are home and dry if the other party won’t agree to the suspension of the contract.

If you intend to rely on the clause then you need to prove that the pandemic is an event which prevented the performance of the contract, making it legally or physically impossible, not just difficult or unprofitable. There must be a direct causal link between the pandemic and inability to perform the contract.

So if you do have a “force majeure clause” then what does it mean in practical terms?

  • These clauses usually allow the parties to suspend the contract. You may need to serve a notice in order to invoke the clause.
  • When the clause is activated it will remove the obligations on the party to perform the terms of the contract
  • Also the clause may allow the parties to terminate the contract on notice if it becomes commercially unfeasible to continue with the contract after the pandemic has subsided.
  • If your commercial contracts don’t contain a “force majeure” clause then it may still be possible to rely on the doctrine of frustration. This applies in limited circumstances where performance of a contract has become impossible.

If you require advice on your options as a consequence of the non-performance of the contract directly resulting from COVID-19 then please contact Eleanor Richards, Partner in the Dispute Resolution team on 01273 810 072 or eleanor.richards@healys.com