Top 3 considerations for your contracts during the coronavirus outbreak
In particular, you should pay attention to these three most popular considerations in light on the current disruption:
It is important to consider whether you or the other party (or parties) have a right to terminate the contract, or to refuse to fulfil their obligations under the contract.
Commercial contracts will normally include a termination clause.
- This will typically set out the grounds upon which the contract can be terminated by the parties.
- It may also include a notice period until the termination of the contract is deemed effective, during which the parties must continue to perform their contractual obligations.
The contract may also include a "Force Majeure" clause.
This is a clause that typically provides that the contract may be terminated or varied (possibly without liability to the other party) if a certain kind of event occurs that prevents either party from fulfilling their obligations under the contract.
The particular wording of the clause will be very important. Force Majeure events may be specifically defined in your contract, or may be dealt with in a more general way (for example, by reference to acts, events or circumstances beyond the reasonable control of the parties). Either way, you should check to see what is covered by the Force Majeure clause, and you should also check to see how the clause is intended to operate. Read our analysis in relation to Force Majeure clauses here.
In short, the particular wording of the Force Majeure clause, with reference to the intention of the parties at the time they entered into the contract and the present circumstances in which the parties now find themselves (to the extent that these can be evidenced), will determine if and when the clause is triggered and the rights of the parties in such circumstances.
The contract must expressly contain a Force Majeure clause in order for a party to rely on it; that is to say, the courts will not imply such a term into a contract.
Common law doctrine of frustration
In the absence of an express Force Majeure clause, you might consider trying to relying on the common law doctrine of frustration.
This is an area of law that has developed from decisions in previous court cases (i.e. common law) rather than from government statutes. It potentially arises where a serious event occurs after the formation of the contract which is both unexpected (so any contractual Force Majeure provisions do not cover it) and is beyond the control of the parties - rendering it physically or commercially impossible to fulfil the contract - or transforming the obligation to perform into something radically different from that undertaken at the time the contract was entered into.
It is only available in certain restricted circumstances and the courts will typically apply it as narrowly as possible. However, (theoretically) it might extend to situations where, for example,
- the subject matter of the contract is no longer available
- where performance of the contract has now been rendered illegal by a change in law
- there has been the cancellation of an expected event, and/or
- there is unexpected delay (though such delay would, in the very least, have to be so abnormal as to be outside what the parties may have contemplated at the time they entered into the contract).
We all hope that the current situation is a one-off, never to be repeated, and yet it would make good commercial sense to amend your standard terms of business to make sure that your Force Majeure clause includes express reference to pandemics, epidemics and crisis situations. When drafting a Force Majeure clause for a new contract you should likewise ensure that it includes express reference to pandemics, epidemics and crisis situations.
It is also worth considering whether your commercial contracts contain punitive non-performance clauses, such as liquidated damages. If onerous clauses like this have been accepted in your commercial contracts, then the (potential) implications of such clauses need to be factored into your business continuity planning.
For more analysis in relation to the implications of the coronavirus on your commercial contracts, please click here.
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