The impact of Covid-19 on business is unprecedented.
Since being reported to the WHO on 31 December 2019, Covid-19 has affected over 65 countries and has been characterised as a global pandemic by the WHO.
As the virus has spread globally it has had a far reaching impact on the global economy. Companies whose manufacturing plants have closed, or supply chains closed across a broad range of sectors, including transportation, retail, professional services and entertainment, have been significantly negatively impacted.
What if a business cannot perform?
If a business is unable to perform the contractual obligations imposed on it, it risks being in breach of contract and liable for damages, or faces the risk that the counterparty may be entitled to terminate the contract.
Such claims and actions will likely increase the economic damage businesses are already encountering.
Force majeure, what is it?
Many contracts contain “force majeure” clauses. These clauses seek to “excuse” a business’s failure to perform if circumstances beyond their control prevent its performance.
Force majeure clauses will often list out the circumstances that they are intended to cover. Flood, fire, terrorism, “Act of God” and, sometimes, epidemic, are the usual circumstances which may excuse non-performance.
IS Covid-19 a force majeure event?
The applicability of a force majeure clause is a purely contractual question. A valid claim that Covid-19 is a force majeure event is likely to depend on:
1. Whether the factual event is defined as force majeure in the contract, for example does the clause refer to an epidemic;
2. Whether the event has impacted the business’s performance of its contractual obligations, for example the unavailability of labour due to travel restrictions;
3. Whether a business has used all reasonable endeavours to mitigate the effects of the event, for example sourcing materials from an alternative supplier or offering alternative materials; and
4. Whether the notice requirements have been complied with.
It is likely that a business seeking to rely on a force majeure clause may struggle for any non-performance prior to 23 March 2020, until which date the UK Government had only advised that certain measures, such as avoiding travel, be taken. It is also likely that the courts will be alive to businesses cynically trying to escape contracts which are no longer as commercially attractive.
When considering claims for force majeure businesses should:
- Carefully review the precise contractual force majeure clause wording;
- Check contractual time limits and notice requirements;
- Collate evidence as to how the epidemic has caused the delay / inability to perform;
- Record and document the steps taken to mitigate the impact of the epidemic;
- Obtain legal advice at an early stage; and
- Carefully consider the value of a longer term commercial relationship.
Warning note to the reader: this is a fast moving and very fluid situation in which new announcements and measures are being made almost on a daily basis. This blog is for guidance only and we can only assure you that it is valid as of 02.04.20. We will make every effort to keep you updated and to help us do that you may like to join our mailing list. Please contact us to ensure that you are on it.