Coronavirus: applying force majeure in business-critical contracts

Law firm Shoosmiths has provided some topical advice on coronavirus. Partners Fiona Teague and Jonathan Smart discuss the issues below.

The coronavirus outbreak and developments over the past few weeks gives rise to a number of pressing commercial and practical issues for businesses in the Thames Valley, Solent and across the south in respect of supply chains, people, banking and finance arrangements and the ability to continue business as usual internationally or otherwise.

Force majeure clauses in business-critical contracts are coming into sharp focus at the moment, as coronavirus continues to sweep the globe and the extent of the impact on global supply chains is becoming increasingly apparent.

Many businesses in our region are concerned about potential disruption as a result of the coronavirus outbreak are reviewing their key contractual arrangements to understand potential contractual implications. Businesses must decide whether urgent actions to mitigate exposure are needed - such as avoiding performance of obligations or exiting the contract - and whether changes to existing business continuity plans are required.

It is worth considering whether the coronavirus outbreak could trigger the application of the force majeure clause in a contract - where it contains such a clause - meaning that a party may not be liable for a resulting failure to perform its contractual obligations. There is no standard definition of a force majeure event under English law, meaning that it is up to the parties to a contract to define the sorts of events which will trigger any force majeure provisions and to set out what the specific legal consequences of the clause being triggered will be.

When considering whether the coronavirus outbreak itself constitutes a force majeure event under a contract, thought should be given to various factors including the following:

• Does the contract define a force majeure event?
• If the definition of force majeure expressly includes wording around pandemics, epidemics or similar events this may be material in deciding whether the coronavirus outbreak falls within the scope of the applicable force majeure clause
• If the definition does not expressly refer to pandemics, epidemics or similar events, other wording in the force majeure clause such as events beyond the parties’ reasonable control or acts of God may be enough to at least run an argument that the coronavirus outbreak triggers the provisions of the force majeure clause. Again, this will depend on the drafting, circumstances and intentions of the parties at the time of entering into the contract
• If the force majeure clause states that the relevant trigger event must prevent performance, the relevant party will need to demonstrate that performance is either a physical or legal impossibility and not just difficult or unprofitable. An increase in the cost of performing the contract for example is unlikely to be sufficient to trigger protection under a force majeure clause, unless the contract’s drafting expressly permits this
• If the force majeure definition expressly excludes events that could be considered reasonably foreseeable, outbreaks such as coronavirus may fall outside of the force majeure protection due to previous outbreaks of similar viruses such as SARS. It might be difficult to prove that another variant of a similar virus was unforeseeable however certain facts such as the unprecedented lockdowns associated with coronavirus may sufficiently differentiate the coronavirus outbreak from others
• Where force majeure provisions are absent in a contract, it may be possible to exit a contract on the grounds of frustration but only in very limited circumstances. Frustration applies where a significant change of circumstances renders performance of a contract radically different from the obligations that were originally undertaken; however, impossibility of performance is the key requirement here and the English courts have set an extremely high bar for holding performance to be impossible. If performance under the contract could have been delivered - even if this would have been burdensome and expensive for the party performing - frustration is unlikely to be available as a way of avoiding performance of contractual obligations

Practical steps and considerations:

• Identify, locate and review latest versions of all key customer and supplier contracts
• Bear in mind, that when seeking to rely upon force majeure provisions, the affected party must be able to show that it has taken all reasonable steps to avoid or mitigate the event and its effects on the party’s contractual performance. Therefore, the affected party should identify what appropriate steps can be taken to avoid or mitigate adverse effects and execute these actions or consider why not
• The contract may include specific requirements on how a party must notify the counterparty of a force majeure event and it is important to note that such provisions may amount to conditions precedent, meaning that if the specific provisions are not followed to the letter, a party may lose the right to rely on the force majeure provisions
• Each party generally bears its own costs during the existence of an event which is a contractual force majeure event

When reviewing a contract for the purpose of understanding the impact of an outbreak of coronavirus on the parties’ obligations and possible mitigating actions available, the force majeure provisions are not the only contractual provisions to consider. Look also at change control or variation provisions - which may govern how the parties can agree to amend or unilaterally amend a contract - as well as termination and suspension provisions. There is no substitute for a full contract review with an understanding of what the key objective of the review is intended to be in mind.

The coronavirus outbreak and developments over the last few weeks gives rise to a number of pressing commercial and practical issues for businesses in respect of its supply chains, people, banking and finance arrangements and the ability to continue to trade internationally or otherwise in the usual course of business.