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Coronavirus & Force Majeure12th February 2020 Corporate
As the Novel Coronavirus (now named Covid-19) which was first identified in Wuhan, China continues to spread, obviously the key concern of governments and health agencies is to stop the spread and treat those infected. However, given the speed of spread of the disease in today’s connected world and the methods used by governments to try to contain the virus, this is inevitably going to have an impact on global supply chains (and dependant on the eventual spread of the disease, potentially local supply chains in the UK).
If businesses are facing difficulties in obtaining goods or services they have contracted to receive (or in supplying those goods or services to their customers), they will need to consider the contract for supply and whether it provides any provisions relating to force majeure (or events outside of the parties’ reasonable control). Normally, such a clause allows a party to be excused performance (or delay in performance) if that failure to perform (or delay in performing) is caused by an event outside of its control.
Where you are dealing with suppliers based outside of the England & Wales, it will be important to also consider what the governing law of the contract is. The treatment of a force majeure event is likely to be different in other jurisdictions and local advice should be taken – this blog solely considers the considerations under English law.
Under English law, if the contract is silent on force majeure, the law will not imply such a clause into the contract. If performance of the very essence of the contract is made commercially or physically impossible then the doctrine of frustration of contract may mean that the parties are discharged from their contractual obligations. It must be noted that frustration of a contract requires impossibility (eg a hall that is being rented out for a period being burned down), not just difficulty, delay or increased cost in performing, and as such is a high hurdle to clear.
If the contract does contain a force majeure clause, it will be important to study it closely. There are a number of things to consider, including:
- As there is no definition of what “force majeure” is in English law, contracts normally specify what is meant by force majeure. This can be done in a number of ways, from a simple statement that it is something “outside of the reasonable control of the parties”, to including a list of examples of the type of events that may be force majeure, but in some circumstances there may be a list of that are definitive and nothing else can constitute force majeure. Therefore, the first thing to look at is whether the current situation is covered, this may be the case if “epidemic” or “acts of government” are included.
- The second thing to look at is whether the event has actually caused the failure or delay to perform. Obviously this will depend on the facts, but if there is evidence that the party claiming force majeure had raw material shortages that weren’t linked to the Coronavirus breakout or had other facilities that weren’t in areas affected by the breakout, then the relief offered by a force majeure clause is unlikely to apply.
- If the contract does contain a force majeure clause that appears to apply, then the next thing to look at is whether there are any conditions that must be complied with in order for a party to benefit from the force majeure clause. Often a contract will require a party who is affected to notify the other as soon as possible and also may require them to take actions to show that they have taken reasonable steps to try to minimise the effect of the force majeure.
- Finally, if you have established that there is a valid force majeure clause that covers the circumstances (and all conditions have been met), then the final thing to review is what the impact of the force majeure event actually is. Normally, the impact of a force majeure clause is to excuse late performance and to extend deadlines for delivery. However, if the event continues for an extended period, then often the contract allows for a party (often the party not affected by the event) to terminate the agreement – so that they can source the goods or services from elsewhere.
As the situation with Coronavirus develops, it will be important for businesses to assess their key contracts and whether they provide protections for either party in relation to an event of force majeure in order to be prepared should the supply chain be impacted and also whether there are any conditions that need to be fulfilled to benefit from these protections. Additionally, when entering into new contracts, the force majeure provisions should be considered carefully to ensure that they provide sufficient protection for future unforeseen events that could impact on continued performance of contracts.
If you want to discuss your contractual protections, please contact your usual JMW contact on 0345 872 6666 or complete the contact form found on this page.
This article is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.