The outbreak and spread of coronavirus (COVID-19) is causing a range of unexpected problems for businesses, manufacturing activity, supply chains, staff availability and transportation. As the picture unfolds, those businesses that are affected may need to review their contractual, legal and insurance position in order to consider what action may be appropriate.
Medilink WM member Mills & Reeve provide businesses with the facts:
Although you may find that contractual provisions and insurance policies provide a clear route to protection, we are seeing situations that are complex and require careful thought as to the best overall approach.
The contractual position
English law does not allow commercial parties to get out of a bad bargain. Subject to exceptions, a party affected by coronavirus is required to perform its side of the contractual bargain and may be in breach of the agreement if it fails to perform its obligations. Together with bringing a claim for damages against the other party for breach of contract, you may also be able to terminate the agreement in such circumstances and therefore you will need to review the agreement for obligations regarding notice. It is important that these be followed carefully for the termination to be legally effective.
Are there any exceptions?
The following may provide an exit route:
- Force majeure clauses: It is usually the case that in a force majeure clause a number of events are specified and then followed by the words “or any other causes beyond our control”. Force majeure will usually operate where performance of an agreement has actually been “delayed”, “prevented” or “hindered” by the specific event. If you do decide to rely on the clause, you should pay attention to any obligations around the giving of notice to the other parties. The key message however is that just because a contract includes a force majeure clause it does not necessarily follow that coronavirus will be automatically be covered. For example, if the clause does not expressly: (i) refer to pandemic or epidemic; (ii) have catch all wording, such as “or any other causes beyond our control”; or (iii) performance of the contract has not been affected by coronavirus. If the clause is used, but later turns out not to cover the situation you are dealing with, there may be a substantial damages award payable to the other party.
- Material change of circumstances: Your contract may contain a clause allowing a party to walk away in the event of a material change of circumstances, although these are less common. If included, these clauses tend to be heavily negotiated. It will be particularly important to review the clause carefully to assess whether it covers the situation faced.
- Change in law: In some circumstances a clause that excuses non-performance of the contract on the basis of a change in law may apply. This will depend on a legal requirement that prevents a party carrying out its obligations, such as a ban on travel. Again, it will be important to review the clause in detail to assess whether it applies.
- The doctrine of frustration: A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract. Where it applies, the doctrine brings an end to the contract, potentially with a return of sums paid subject to deductions for expenses. That said, it is important to appreciate that frustration currently operates within narrow confines and successful application of this principle is rare. For example, a recent case involved an application by the European Medicines Agency to terminate a long lease because it had to move out of the UK due to Brexit was rejected by the court.
- Insurance cover: Many contracts require a party to take out insurance to cover particular risks. However, the risks that must be insured tend to be defined precisely and it is possible that unforeseen problems like those arising from the coronavirus outbreak will not be covered by such policies.
Full article can be found here