Covid-19… What are the potential impacts to UK business Contracts?

Coronavirus was first identified in Wuhan, the capital of China’s Hubei province, in early December 2019. More than 20,000 cases of the virus had been confirmed by 5 February, predominantly in China although isolated cases have been confirmed in a number of Asian and European countries as well as the UK, US and Australia.

The outbreak of the novel coronavirus, Covid-19, is an ongoing epidemic that poses significant issues for businesses. Restrictions on movement in the current countries currently affected and on international travel have resulted in the cancellation of many public events and causing disruption to supply chains. Businesses in affected countries have been forced to suspend operations or find alternative means of working. Affected businesses may need to consider, from an English law perspective, the contractual and legal issues arising from this situation.

Contractual position

English law contracts that require ongoing performance are, in principle, absolute; that is, a party affected by the Covid-19 outbreak is required to perform its obligations and will be potentially liable to its counterparty for a failure to do so. There are two key exceptions to the rule:

  1. Force Majeure

Businesses should first identify whether any of their commercial contracts contain ‘force majeure’ clauses which their suppliers may try to invoke, or which it may ultimately become appropriate for them to attempt to invoke themselves.

Force majeure clauses may be invoked when an extraordinary event or circumstance beyond the control of the parties prevents one or both from fulfilling its obligations under the contract. The effect of the clause is to free both parties from liability.

Under English law contracts, the term ‘force majeure’ is not a legal one, and is therefore open to interpretation. The interpretation of such will very much depend on the drafting of the contract and the specific circumstances affecting performance and even if it is covered, other requirements may still need to be satisfied to constitute force majeure.

  • Frustration

In the absence of a force majeure clause, parties might have recourse to the common law doctrine of frustration. This provides that a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different. This sets a high bar and in the case of J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] the courts confirmed that the circumstances where it can be invoked are narrow.

If frustration applies, the Law Reform (Frustrated Contracts) Act 1943, allows recovery of monies paid under the contract before it was discharged, subject to an allowance, at the court’s discretion, for expenses incurred by the other party.

Businesses should carefully review contracts in light of the relevant governing law to ensure that they are taking the right action. Take heed in particular, to any contractual notice requirements or duty to mitigate the impact of the force majeure event, as a failure to comply with these requirements will probably mean that you are unable to benefit from the provisions.

If you have any queries or would like further advice in relation to the above, then please contact Fiona Boswell on 07824 621134.

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