Coronavirus, disruption and legal liability

The impact of the coronavirus pandemic is being felt throughout the economy from supply chain disruption to venue hire cancellations, travel bans and more. Inevitably as the pandemic continues there will be a surge in questions about legal liability for delayed performance, requests for refunds and contract termination enquiries. In this blog, we focus on the implications of force majeure clauses for exceptional circumstances and the key legal principles for business owners to bear in mind during these challenging times. 
 

What is the purpose of a force majeure clause?  
A force majeure clause gives a party relief from failure to perform its obligations under a contract when this might not be permitted under the general law. In other words, that party will not be liable for its failure to perform the obligations and the contract will not be terminated due to breach.

A party seeking to rely on a force majeure clause must prove that:

1. the clause covers the event in question;
2. non-performance was due to circumstances beyond that party’s control; and
3. no reasonable steps could have been taken to mitigate the event.

A contract may impose further pre-conditions on a party seeking to rely on a force majeure clause such as notification requirements, extended timescales for performance and a notice period for termination. With this in mind, it is imperative to carefully read the clause to ensure that valid notice is given in accordance with the contract terms. 

What are force majeure events?
A lot will depend on the wording of a force majeure clause and the practical context of the contract. The words “force majeure” have no established meaning in English law so whether or not the relevant contingency is covered by the clause will largely depend on how it is drafted (which varies significantly from one contract to another). For example, “epidemic” or “pandemic” may be included within a finite list of disrupting events or as part of an open-ended list that is expressed as being “without limitation”.  The expression “acts of God” is also often used as an example and this typically refers to natural disasters such as floods, droughts or earthquakes.

In general the event must be beyond your control and it follows that you cannot rely on a force majeure clause if your business is responsible for the cause of the event in question. Some clauses will refer to “reasonable control” with the implication being that the contract excludes events that could reasonably have been avoided. In some instances it might be possible to perform a contractual obligation by different means e.g. through purchasing goods from an alternative supplier albeit at a higher price as considered in the case of Exportelisa SA v Rocco Giuseppe Figli Soc Coll [1978] 1 Lloyd’s Rep 433 (CA). You should also bear in mind that the force majeure event must be the only cause of the breach and not incidental to another breach.

Breach of contract and frustration
There is no requirement to perform an obligation where a contract has been discharged by breach or frustration. Discharge by breach takes place when one party commits a breach of a vitally important term that goes to the root of the contract. Where this happens the other party will have the option to terminate, and if that happens, both parties will be released from performing their primary obligations under the contract. In the absence of an express force majeure clause, the common law principle of “frustration” may apply.  Frustration takes place when a contractual obligation becomes incapable of performance due to impossibility, illegality or if it becomes radically different from that contemplated by the parties at the time of the contract.

According to the courts, the circumstances in which frustration will apply are narrow but in the event of a nationwide lockdown it may become relevant. The Law Reform (Frustrated Contracts) Act 1943 provides that a party will be entitled to recover monies paid under a contract before it was automatically discharged but a court may require an allowance to be made for the other party to take account of expenses it has incurred.

Action points
If you expect daily business or planned events to be disrupted because of the coronavirus outbreak, you should consider the following action points:

• Look at the force majeure clauses of contracts with customers and suppliers to find out what situations it covers whether any time limits or notification requirements apply.   
• Think about whether there are any other ways you could reasonably have achieved performance of the obligation to mitigate or avoid the effects of the disrupting event.
• Keep written records of correspondence, notifications and updates about the disruption.
• Check if your insurance covers any loss suffered as a result of disruption due to coronavirus and take note of any insurer notification requirements before you take further action.

If you have an enquiry about contract law or need help in preparing robust yet commercially orientated terms and conditions for your business, please get in touch with our Corporate and Commercial team.