Stephen Sidkin, partner at law firm Fox Williams, discusses the impact coronavirus could have on contracts.
As the coronavirus news keeps on coming, it is inevitable that some fashion companies will seek to use the outbreak to justify failures to fulfil contractual obligations. This is likely to focus on what lawyers call “force majeure” or ”frustration”.
Force majeure is usually taken to mean the occurrence of an event outside of the control of two parties that prevents one or both sides from fulfilling the contract. It is a provision often found in commercial contracts. ”War”, “strike”, and ”riot” are often listed in a force majeure clause, and their meanings are quite clear. Equally, ”act of God”, whether it be hurricane, flood or earthquake. But, ”epidemic”?
Whether or not the coronavirus will come within a force majeure clause will vary depending on the words used, the subject matter of the contract, and the event in question.
Whether it be a delay in goods being manufactured, travel plans disrupted, or the signing of a contract being delayed, the consequences of the coronavirus are likely to be with us for a lengthy time.
As such, here are a few points to consider, now and in the coming weeks, in relation to the coronavirus, force majeure and your business:
- Is there a force majeure clause in the contract?
- If so, would coronavirus come within the definition of a force majeure event?
- Is there an obligation to give notice if a force majeure event occurs?
- Is there a maximum period of time during which obligations of the parties are suspended? Does this apply to both party’s obligations or only the party whose actions under the contract are impacted by the coronavirus?
- Is there a right to give notice to terminate the contract if the force majeure event continues for a certain period of time? Is this a right for both parties, or only the party that is no longer receiving the benefit of its counterparty’s performance under the contract?
Check whether your contracts provide for certain payments to be made to you, or by you, if there is a breach of certain performance obligations. However, keep in mind the risk of such payments being categorised as unenforceable penalty payments under English law.
If you receive a notice from your counterparty that it is seeking to rely on force majeure, or you give such notice, you should consider what steps you can take to mitigate your loss.
If you and your counterparty are in agreement as to the coronavirus constituting a force majeure event, this may offer you an opportunity to bring an unfavourable contract to an end ahead of schedule. But be careful what you wish for. Consider what your back-up plan is:
- Do you have another counterparty in mind that can step into the contract at short-notice?
- Do you need to conduct an audit on your new counterparty – if so, how long will this take?
- What onwards contractual obligations are you tied to that could be impacted by a change in your contractual relations?