The impact of Covid-19 on businesses is unprecedented and profound. Government restrictions and guidelines, the impact on supply chains and the unavailability of staff are all affecting businesses’ ability to comply with contractual obligations. Sean Upson, a partner in our Commercial Litigation and Securities Litigation teams, examines this.
Stewarts has received many requests for advice from companies whose manufacturing plants are being shut down, or whose supply chains are being affected. It is evident that contracts in a range of sectors, including transportation and shipping, retail, sports and entertainment, are under increasing scrutiny. From contracts relating to the supply and sale of goods, to the provision of services, financial agreements, broadcasting rights, tickets sales, advertising and sponsorship agreements and business leases, the consequences are far-reaching. Every situation is different, and the legal landscape is continually – and quickly – evolving.
What if a business is unable to perform?
If a business is unable to perform, then they risk being in breach of contract and liable for damages, or the counterparty may be entitled to terminate the contract. So, the manufacturing plant contracted to produce goods, for example, may be liable to its customer for not delivering.
Such claims could exacerbate the economic hardship keenly felt by businesses and individuals worldwide – and I believe the coming weeks and months will see significant breach of contract and damages claims.
What is force majeure?
Many contracts contain so-called “force majeure” clauses, which excuse a business’s non-performance if circumstances beyond their control prevent (or sometimes hinder) performance.
These clauses often list out the circumstances which excuse non-performance and they may include flood, fire, terrorism, “Act of God” and – sometimes – epidemic.
The question of whether Covid-19 qualifies as force majeure event is complex and depends on several issues. That’s why force majeure is not a “get out of jail free” card.
Does Covid-19 qualify as force majeure event?
First, the business typically has to show its performance has been made impossible. This argument may not be straightforward as until the UK lockdown on 23 March, the government had merely advised that certain measures be adopted (for example, avoiding travel) but it had not legislated to make it impossible for workers to leave home.
While it’s unclear how long this lockdown will remain in force, even under lockdown it may be technically possible – if expensive and difficult – for contracts to be performed. So, a business may face a situation where performance is practically or economically difficult – but where it is not impossible.
A business must also ask whether it can perform the contract in another way, such as remote working or by sourcing replacement goods or services for its customer from a country which is not affected. Each situation needs to be judged on its own circumstances to establish if the Covid-19 restrictions have sufficiently prevented performance to qualify.
Secondly, I think the courts will be alive to anyone cynically trying to excuse non-performance of contracts which they could not perform anyway, or which are not commercially viable. Typically, a business cannot use force majeure to excuse a failure to perform which was going to happen anyway. Also, the fact that a contract has become more expensive and possibly uneconomic to perform is generally not an excuse.
Businesses need to evaluate their contracts and whether force majeure applies very carefully. They may be protected from the difficult conditions we are all now facing – but they must review their contracts and circumstances urgently to check their precise position.
This article was first published on CITY A.M. 26 March 2020, click here to view
Covid-19 is impacting individuals and companies around the world in an unprecedented way. We have collected insights here to help you navigate the key legal issues you may be facing at this time.
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