The Covid-19 pandemic, and recent evolving measures taken by the government, raises a plethora of issues and concerns for businesses, many of which were unimaginable just a few months ago. With supply chains disrupted and the future uncertain, suppliers will be assessing what reliefs might be available to them if they are unable to perform their contractual duties and obligations.
Relief may be available by reason of force majeure (where this is permitted under the contract), or under the common law doctrine of frustration. Whether any such comfort is available will be crucial to any negotiations that may entail between, and the approach taken by, the parties.
Force majeure
A contract which contains a force majeure clause may excuse a party’s failure to perform where it is a result of circumstances or events outside of that party’s reasonable control (for example, the occurrence of a natural disaster, an act of terrorism or war, or government action). The wording of force majeure clauses can vary greatly, and each clause would need to be considered in context, but some initial guidance can be identified.
Force majeure clauses that adopt broad language with specific references to, for example, “epidemics” and “government restrictions” may be helpful (but not conclusive) for suppliers.
Some force majeure clauses are restricted to circumstances and events that render performance of the contract impossible, and may not cover situations where performance simply becomes more costly for a party. In the former case, a supplier would need to establish that it was unable to meet its obligations by alternative means (for example, sourcing alternative supplies or workers), irrespective of the additional costs that may involve.
The date on which a contract is entered into will also be relevant factor, particularly if a force majeure clause excludes events which a supplier could have reasonably foreseen and against which it could reasonably have been expected to take preventative action. Could the current Covid-19 epidemic have been foreseen in light of, for example, the SARS epidemic or, if the contract was entered into relatively recently, in light of the effects seen across the globe in last few months?
In any event, a supplier seeking to rely on force majeure as an excuse for non-performance (or late performance) will usually be under a duty to take reasonable measures to mitigate the effects of the relevant force majeure circumstances and events.
A force majeure clause may suspend, and extend the period for, performance; and may also include a longstop date after which (and assuming the circumstances or events are continuing) either party may have a right to terminate. In the absence of a right to terminate, suspension of the contract might continue until performance is restored.
Any party wishing to rely on a force majeure clause will need to comply with any procedure set out in the clause. This might include serving timely notice of the force majeure circumstances and events, and the nature and extent of the effect on performance. A failure to comply with any procedural requirements could mean the loss of the relief.
Frustration
Where a contract has no force majeure clause, the common law rules on frustration might apply. If they do, it would discharge a party from its contractual obligations. To apply, there would need to have been a change in circumstances that made it physically or commercially impossible to perform the contract, or that caused performance of the contract to be thoroughly different to that expected under the contract.
As with force majeure, the burden of proof will rest with the party seeking to rely upon the relief. The courts have adopted a narrow interpretation of frustration, and a restrictive approach to the relevant events that can lead to a contract being frustrated. Examples could be events which, if occurred, would render a party’s performance illegal, such as government action to close locations and restrictions on travel and movement.
Circumstances and events that lead to additional costs of, difficulties in, or delays to, performing a contract would not constitute events of frustration, but might be sufficient to allow a party to trigger relief under a force majeure clause. Likewise, where a force majeure clause covers only delays in performance, and events have occurred which render performance of the contract impossible, frustration may be available as a relief.
If a contract is frustrated, it will end automatically and the parties will be relieved of their performance obligations. The parties will be entitled to recover sums paid under the contract before termination, subject to allowance (as the court determines) for expenses that may have been incurred by the other party to the contract.
Insurance
Businesses whosuffer losses as a result of the disruption caused by Covid-19 should consider the extent to which they may be covered by insurance, and the process for making any claims.
As with any procedures prescribed under force majeure clauses, there is likely to be rigid requirements to comply with in order to make claims. Typically, notice of any claim will need to be given (usually within a defined period of time), steps and measures taken to mitigate losses, and an obligation to consult with insurers in advance of taking any action under the contract).
Not all insurance will cover losses caused by Covid-19. Standard insurance for business interruption will generally cover lost income by reason of physical damage caused to property, and so would not provide cover where Covid-19 does not cause physical loss. Where businesses have been able to extend their policies to cover non-physical losses, it will be vital to establish whether they include (or exclude) those arising as a consequence of epidemics and other circumstances currently affecting the business.
If we can assist with any questions you may have, please get in touch by telephone on 01206 574431 or by email at info@tsplegal.com and we will direct your query to the relevant team.
