Saturday April 4, 2020

The legal view: Covid-19 and your contractual obligations

‘Force majeure’ clauses may offer a route out of difficulty for companies, but there are a number of hurdles

19th March, 2020
Force majeure clauses may permit either delay, partial performance or, more commonly, termination of a contract

Covid-19 is having an unprecedented effect on trade and commerce. Businesses are having to reassess risks over the performance of contractual obligations. As a general rule, Irish law does not discharge obligations just because performance of the contract becomes difficult, onerous or costly, even where this is the result of unforeseen circumstances. A business cannot excuse non-performance or delayed performance simply because of the increased cost that is attributable to self-isolation of its workforce.

The most common means whereby a contract may provide relief is through what is known as a “force majeure” clause, from the Latin meaning “superior force”. This is frequently included in commercial contracts, such as manufacturing, transport and the supply chain, where it will expressly deal with how unforeseeable events and circumstances will affect the commercial relationship.

A comprehensive force majeure clause will identify specific event categories, such as changes in regulation, administrative actions by government or strikes. Some clauses refer in a more generic manner to “any other cause beyond the relevant party’s control”. Given that few existing force majeure clauses expressly refer to pandemics or the level of economic shut-down occasioned by Covid-19, the wording of the clause will dictate whether it can be interpreted as affording relief.

The courts have been consistent in refusing to engage in excessive interpretation when the plain English reading of a clause is perfectly clear. The factual circumstances will be highly relevant. Even if a pandemic isn’t provided for, indirect fallout such as travel disruption, quarantines and closure of public services may well be covered. A clause that refers to events “beyond the control of the relevant party” can only be relied upon if that party has taken all reasonable steps to avoid its operation or mitigate its results.

It is for the party exercising a force majeure clause to show that a relevant event has occurred. The clause may permit either delay, partial performance or, more commonly, termination of the contract.

Technical hurdles

If force majeure is not an option, other legal avenues may be open. Under the doctrine of “frustration”, when an event occurs that results in a fundamentally or radically different situation from what was in the contemplation of the parties when the contact was made, a court may recognise that there is an impossibility of performance and discharge the parties from the contract. Establishing frustration is fraught with technical hurdles but has been used during war and in the case of the requisition or detention of ships.

Attempts have been made recently to invoke frustration following Brexit and Sars. In both cases, the courts refused to extend its application, at least where land is involved. It could be argued that following Sars and other epidemics, including swine flu and Ebola, Covid-19 might not be regarded by the courts as being an unforeseeable event constituting legal impossibility of performance.

The mechanism for termination or suspension of a contract for either reason will depend on each contract; however, given the high threshold to be met when invoking these, businesses should take legal advice. The consequences of a mis-step at this critical stage could involve significant claims for unlawful breach of contract.

Trying time

Business should also be on the lookout for trading partners that may opportunistically seek to invoke force majeure or termination to escape a contract that has simply become undesirable. What businesses do now will have consequences for any future dispute including any prospect of an injunction to prevent the contract breach occurring.

This is a trying time for business, but it will pass. What state a business emerges in will depend on decisions made under pressure. Decisions on termination of contracts may have long-lasting and unintended consequences. All businesses should review their commercial contracts and read the force majeure clause – if any – in particular.

All existing insurance policies should be reviewed by appropriate professionals to assess if they provide any recovery option in the event of losses suffered as a result of the pandemic. Any contracts currently being negotiated should certainly include provision for pandemics/infectious diseases on this scale so that all parties have certainty.

An agreed approach with customers and suppliers is always going to be preferable to litigation but some situations may call for legal advice, sooner rather than later, so that any decision taken now is fully informed.

Sean Nolan is a commercial partner and Sam Saarsteiner is a commercial litigation partner in Clark Hill Solicitors, Dublin.

Related Stories

Patrick Cox, Liam Foley and Eoghan Kearney had sought discovery of papers relating to Nama-directed sale of properties

Rosanna Cooney | 1 day ago

High Court action over dispute with BAM being taken ‘to defend the public purse’

Rosanna Cooney | 1 day ago

Latest measures may curtail landlords’ property rights but they are proportionate to the scale of the emergency we face

Peter Shanley | 4 days ago