Covid-19 – What is the commercial cost?
Large-scale events and sporting fixtures are being cancelled worldwide and it looks like the commercial cost of Covid-19 is potentially catastrophic. With Italy in lock-down and other areas likely to follow, businesses are increasingly vulnerable. So what can they do to mitigate the risk of this pandemic?
How will business owners cope if these extreme circumstances mean that they can no longer successfully comply with their contractual obligations?
Should the government put a locality or town into quarantine, this would effectively seal off the local businesses and prevent them from carrying out their normal activities. In the case of a manufacturing business, employees wouldn’t go to work, raw materials wouldn’t be delivered and manufactured goods wouldn’t be supplied to customers. This could render a business in breach of contract, through no fault of their own. If there are no specific provisions for such an event within the contract itself (eg ‘force majeure’), then businesses can turn to the concept of ‘frustration’.
Generally speaking a ‘frustrating event’ is one that unexpectedly occurs at a time after the contract has been formed. It must be fundamental, going to the heart of the contract and in a way that is entirely beyond what the parties could reasonably have contemplated. It must not be due to the fault of either party and it must make further performance Illegal, impossible or at least radically different from that which was contemplated by the parties at the time the contract was made.
This doctrine has been successfully applied across a very wide spectrum of different contractual situations. ‘Frustration’ may also apply where a series of events taken together render performance of the contract radically different from what was contemplated when the contract was made. If frustration is proved, then the party is relieved from further performance of its contractual obligations.
Things get much trickier if the government merely ‘recommends’ a course of action without making it compulsory. If fulfilling contractual obligations just becomes more expensive for one party, that is unlikely to frustrate the contract; on the other hand, unreasonable or extreme delay may be sufficient to frustrate the contract.
His Hon Peter Ralls QC, Paris Smith:
“The burden of proving a frustrating event is a heavy one. Any individual or company entering into any new contracts during this period of uncertainty would be well advised to make sure that a detailed and comprehensive ‘force majeure’ escape clause is carefully drafted and included.”
Should companies be cancelling events?
Planners of all types of events, from the biggest international concerts and conferences to the smallest community gatherings, are facing hard questions about whether to carry on as planned. They all face the same conundrum: is a public gathering worth the risk of spreading the virus?
The impact of cancellations is wide ranging and may result in significant losses for many businesses, including organisers, hosts, participants, exhibiters, sponsors and media firms, as well as numerous other businesses that would otherwise stand to benefit from the event related tourism. Whether you are the host of an event or an attendee, it’s important that you know where they stand legally particularly, in terms of money already paid out…
What does the contract say?
The first port of call (as always) is the contract terms. Does the contract specifically deal with the possibility of the event being cancelled/postponed and what the repercussions of this would be on each party’s liability to the other? In the absence of express cancellation provisions, English law contracts that require on-going performance are, in principle, absolute; that is, a party affected by coronavirus is required to perform its obligations and will be potentially liable to the other party if it fails to do so. The two main exceptions to this are ‘force majeure’ and ‘frustration’.
What is force majeure?
A force majeure clause is normally used to describe a contractual term by which one or both of the parties is entitled to suspend performance of its affected obligations (or to claim an extension of time for performance), following a specified event beyond its reasonable control. It may also entitle termination of the contract, usually if the event exceeds a specified time.
Force majeure clauses differ, some are short form and some are long and detailed, so the specific clause in question will need careful review. However key points to consider are:
- Is ‘epidemic’ specifically covered by the clause?
- Has there been a government decision or action preventing performance that meets the political interference language commonly used in such clauses? For example, the government putting the country into ‘lockdown’ and banning mass public gatherings?
- If not, is it the type of event that falls under the general ‘beyond the reasonable control of the affected party’ standard wording?
Even if covered, other requirements may still need to be satisfied to constitute force majeure:
- Was coronavirus reasonably foreseeable? This will be more relevant to more recent and future contracts, now that the effects of the epidemic are inescapable and we don’t know for how long the effects will be felt. Certainly contracts for future events later this year/next year would want to agree how risks around the outbreak and potential cancellations should be allocated.
- The party seeking to rely on force majeure usually has to establish causation – ie that it is the coronavirus outbreak that has prevented or hindered them from performance of the contract (as opposed to some other issue).
- The party claiming force majeure relief is usually under a duty to show that it has taken reasonable steps to mitigate/avoid the effects of the epidemic. Could the event in question be postponed rather than cancelled, for example? Could it be held virtually, reduced in size or held with further safeguards in place?
- Prompt notification to the other party is also often required in order to obtain relief under the force majeure provision.
What are the consequences of establishing force majeure?
In most contracts this will lead to relief from performance of contractual obligations and an extension of time to target dates. Commonly, parties bear their own costs arising from any force majeure delay. Extended periods of force majeure can lead to a right for one or more parties to terminate the contract.
But what if you are a consumer facing business?
All these issues will apply equally to consumer facing businesses that are forced to cancel or postpone events such as concerts, performances and conferences. However, consumer protection legislation will add an extra layer of complexity, compared to business-to-business contracts. Whether or not you can use force majeure to side step liability will depend on whether this would be considered fair under the Consumer Rights Act 2015, the key piece of legislation in the UK governing consumer rights. Force majeure clauses are more likely to be meet the requirements of fairness if:
- They only operate in circumstances that make it impossible or impractical for the business to complete the contract
- The customer’s attention is drawn to the risk of cancellation, if it is a real possibility, and
- They clearly and specifically describe the circumstances that the clause is intended to cover, using plain and intelligible language. For example, using the words ‘events outside your control’ instead of the legal term, force majeure. Also, there should be no listing of matters as force majeure events, that could be within the business’ control – such as industrial disputes with the business’ own staff or equipment breakdown
Hanging onto all pre-paid ticket money in circumstances where the event did not go ahead is likely to be viewed as unfair. It would normally be advisable for businesses cancelling events in reliance on force majeure (particularly in a consumer facing context) to be prepared to issue a full or partial refund to their customers.
In the absence of a force majeure clause, parties might have recourse to the common law principle of frustration, as outlined earlier in the article. 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 the performance radically different. However, as His Hon Peter Ralls QC cautions, this test is a very high bar – and the courts have confirmed that the circumstances where it can be invoked are narrow. Undoubtedly the bar will be reached in some cases arising from coronavirus – for example, where a state-imposed lockdown prevents performance. If frustration applies, monies paid under the contract can be recovered, subject to an allowance for expenses incurred by the other party.
Final points to consider
- Do you have specific event cancellation or business interruption insurance that may cover any losses suffered? The specific wording will need to be to be reviewed carefully.
- How are you going to manage the reputational risk of cancelling (or going ahead) with a key event and how are you going to communicate your decision?