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Coronavirus - The threat to business contract fulfilment and large public gatherings

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Authorities around the world are seeking to limit the spread of the coronavirus and COVID-19. But events such as the Geneva Motor Show have been cancelled and there is concern about the supply chain which is dependent on the movement of goods and components from China and around the world.

What happens when an unforeseen event prevents a party from fulfilling its obligations under a contract, and what events count as unforeseen?
 

Contract clause: Force majeure

A force majeure clause in a contract suspends, and may excuse altogether, the parties’ obligations where a party is prevented from performing its contract obligations by events outside its control.

There is no single definition of force majeure. It is for parties to agree in their contract what constitutes an event which will modify or excuse their obligations. Many businesses will now be reviewing their contracts to see whether current coronavirus related events are catered for.

By definition, it can be impossible to foresee exactly what the interfering event will be, whether it is a virus, an Icelandic volcano erupting or Brexit. Parties and their lawyers seeking to rely on force majeure usually resort to wide wording and lists. One effect of the coronavirus may be to see public health issues feature more prominently on the lists of what amounts to force majeure.

Traditionally a supplier is more likely to want to invoke force majeure and may want to define events such as industrial action or a sub contractor’s failure as force majeure. By comparison, COVID-19 may be viewed as an event which could easily affect customers as well, for example a company which has booked a major conference venue but whose delegates may no longer wish to travel.

Given the potential for restrictions on large public gatherings, as in Switzerland, force majeure clauses can include compliance with government requests. In general, the courts will assume that the parties’ intention was to grant relief only where the event was genuinely outside their control. In the case of Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No.3) [2003] EWCA Civ 103, the court found that the event did not fall within the force majeure clause because the affected party had instigated the letters from the Macedonian government requesting it not to perform the contract.

The burden of proof is on the parties seeking to rely on the force majeure clause. That party needs to show that the event falls within the clause and that the fact that it did not perform the contract was due to that event.

The wording of the force majeure clause needs careful consideration. For example, words such as “delay” set a lower hurdle than words such as “prevent”. The force majeure clause can be drafted to suspend an obligation, remove the party’s obligation, remove the party’s liability for not performing or for delaying - usually for as long as the force majeure event continues, or it may even allow the party to terminate the contract.

Common law doctrine: Frustration

Where there is no express clause, the affected party may rely on the common law doctrine of “frustration”. However, frustration only applies in more restricted circumstances where performance has been impossible and offers more limited relief. Generally, changes in market circumstances affecting profit or the ease with which the parties’ obligations can be performed are not considered frustrating events.

So when, in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), the EMA argued it should escape its obligations under a 25 year lease of premises in London because the unforeseen event of Brexit meant it would be moving its headquarters to another country (within the EU), the High Court refused to treat Brexit as a frustrating event. The building could still be let, even if Brexit meant the EMA did not want to occupy it.

Courts have held that events have been frustrated where the subject matter of the contract has been destroyed e.g. a music hall by fire, or the death of an individual where the contract is of a personal nature e.g. the star musician performing.

So, to the extent that coronavirus simply makes contracts more difficult or more expensive to perform (for example because the price of goods has risen), this will not normally be a force majeure or frustrating event.

Conclusion

Clearly, force majeure clauses and frustration need to be seen in the wider context of the parties’ commercial relationship and of other contract arrangements such as alternative sources of supply and insurance. If you have concerns about the impact of coronavirus on the supply of goods and services and whether a force majeure clause or indeed frustration applies, it is prudent to seek advice early to enable you to take commercial decisions with the benefit of advice as to your legal position and not miss any key notice dates.

If you have any questions about this blog, please contact John Mackle or Simon Young.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.