Cancellation and breaches of contracts due to COVID-19

The overall scale and length of the disruption caused by coronavirus is difficult to predict, as is the impact on the UK and global economies.

In light of the unfolding health situation and period of uncertainty that surrounds us all, you will almost certainly be cancelling contracts or breaching contract terms through no fault of your own or will be on the receiving end of cancellations and breaches as a result of the action, or inaction, of your contracting parties. This can include (but not limited to) cancellation of planned events which you have organised or paid to attend; a breakdown in your supply chain due to a key component not currently being available; to breaching payment terms.

Force majeure clauses

Contracting parties will naturally be keen to know whether they can rely on what is known as a ‘force majeure’ clause in their commercial contracts in such instances. A force majeure clause is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond its control arise, making performance inadvisable, commercially impracticable, illegal or impossible at no fault of any of the contracting parties.

Will a force majeure clause stand up legally?

Under English law, a force majeure clause is not defined, either in statute or in case law. Added to this, the concept cannot be implied within a contract, meaning that the parties can only rely on a force majeure clause if it is expressly written into a contract.

Whether a specific clause is triggered will depend entirely on the words that the parties have used – particularly the non-exhaustive list of events that are often included in a force majeure clause. These typically include acts of God, industrial action, riots and government action banning or impeding any party from performing its respective obligation.

Does coronavirus trigger a force majeure?

Since COVID-19 is a relatively new phenomenon, it is unlikely that any force majeure clauses would explicitly refer to the event of a coronavirus outbreak. To rely on the clause, the contracting parties will need to carefully consider the wording of the specific clause. At this stage, it could be possible that reference to events such as epidemics, actions by government agencies, or work stoppages could potentially relate to the coronavirus outbreak.

Generally, the interpretation given to a force majeure clause will depend on the overall wording of the contract and the meaning the parties could reasonably attribute to its terms. Therefore, each force majeure clause would need to be considered on a case by case basis to judge whether or not it could apply.

What is the effect on a contract?

Each individual contract will vary dramatically and so will the legal treatment of the related force majeure clause contained within each contract, provided one has been included.

What do you need to show to rely on force majeure?

Typically, a party will need to show that:

• a force majeure event has occurred which is beyond its control;
• the event has prevented, hindered or delayed its performance of the contract; and
• it has taken all reasonable steps to avoid or mitigate the event or its consequences.

If your contract is subject to English law, then it’s up to the party relying on force majeure to specify the contractual effects.

To benefit from any of the consequences mentioned above, recent case law suggests that the party looking to be excused from their contractual obligations must have been ready and willing to perform the contract, had it not been for the force majeure event.

Important force majeure considerations when drafting or negotiating a contract

If you are currently negotiating a contract and disruption resulting from coronavirus could be capable of affecting the performance of the contract and you wish to cover this eventuality in a force majeure clause. The wording of the force majeure clause will need to be considered carefully.

In English law, if the contract is silent on whether the force majeure event needs to be unforeseen, a court will be reluctant to imply this. It is therefore imperative that you check any contracts which you are currently negotiating and consider whether it is in your best interests for the force majeure event to be classed as unforeseen or not.

If there is a real risk that a contract may not be capable of being performed as a result of coronavirus, the most straightforward option, in our view, would be to expressly name coronavirus in the force majeure clause to remove any uncertainty.

This type of express wording will force the parties to think about what the remedy should be if the clause is triggered. For example, would the party unable to perform the contract want it to be suspended, or would both sides prefer to be able to walk away and consider alternative options?

Generally, if a force majeure event occurs, the performance of certain obligations within the contract will be suspended for a specified period of time, for example, until the coronavirus outbreak is contained or its consequences on the contract parties come to an end. In some cases, suspending obligations may not be viable, and parties may have no alternative than to seek to terminate the contract entirely. Contracts often provide for the parties to have the right to terminate after force majeure has been in effect for a defined time period.

If the contract is not deemed impossible to perform but is merely uneconomical or different in scope, if you want to renegotiate, a right to do so would need to be specifically drafted in the contract, and even then, the courts are reluctant to hold the parties to this agreement.

Alternatively, if a party does not perform its obligations under the contract and it is subsequently found that the event did not trigger any force majeure clause, the defaulting party is likely to be held in breach of contract and may face a claim for damages.

How to mitigate potential negative implications?

We would always recommend that you review any commercial contracts you have where your performance or a contracting party’s performance may be affected by coronavirus in order to mitigate any losses at an early stage.

If it is likely that one of your contracts may be affected by coronavirus or in response to coronavirus, it would be beneficial to act fast and begin a dialogue with your contracting parties. This will allow for as much lead time as possible to prepare for the potential fallout and mitigate potential losses to you and your contracting parties.

If you are unsure whether a force majeure event applies to specific contracts you are party to, or what relief may be available to you, please do not hesitate to seek legal advice from our Commercial team before you act or send any communications.

If you feel your reliance on a force majeure clause may be disputed or indeed if a dispute arises because of your application of a force majeure clause (or lack of), our Dispute Resolution team is on hand to help you.