The effect of Coronavirus on business contracts

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Commercial solicitor Emma Reed looks at the effect of Coronavirus on business contracts.

It’s an uncertain time worldwide at the moment as the situation following the outbreak of Covid-19 unfolds. The news is constant and government advice changes daily. Boris Johnson has banned social gatherings, restricted movement and closed many businesses, including non-essential shops, pubs and restaurants.

The impact on trade will be far-reaching as businesses attempt to cope with the new environment and keep themselves going. One area that is likely to be significantly affected is legal contracts.  There will be businesses which have contracted to supply goods or provide a service they can no longer honour through no fault of their own. And there will be businesses who have contracted to buy goods and services which they no longer need and will therefore be looking to cancel those orders.

So what is the effect of Coronavirus on business contracts?

Some contracts contain a ‘Force Majeure’ clause, the purpose of which is to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties from fulfilling obligations

If your contract has a force majeure clause you will need to consider whether it would cover COVID -19. It is still not certain that a party will be able to rely on force majeure to protect against claims for non-performance as a result of the difficulties caused by the coronavirus outbreak. It will depend on the wording of the clause itself and the circumstances pertaining at the time.  Due to the serious impact on the parties’ rights and obligations, such clauses are interpreted strictly by the English courts. A  party will have to show that:

  • a force majeure event has occurred which is beyond its control; and
  • it has prevented, hindered or delayed its performance of the contract; and
  • it has taken all reasonable steps to avoid or mitigate the event or its consequences.

It is not a given that if there is a force majeure clause you will be not be liable for a breach of contract claim.

UK courts in past cases (though of course decided before the COVID – 19 outbreak) have not considered economic reasons for relying on force majeure as adequate. If  a contract has become more expensive – or even uneconomic – to perform, that will not constitute force majeure. For instance, if half the attendees at an event were unable to go due to a lock down, or simply choose not to attend, thereby making the event unprofitable, that may not be viewed as an adequate reason to have cancelled the event.

You will also be expected to mitigate your losses in a force majeure case- for example by postponing an event or providing an alternative to attending the event such as a video link to give attendees a choice. You need also to consider a scenario where you decide to carry on with an event and somebody contracts the virus. Would the victim be entitled to sue you for negligence?

When looking at the effect of Coronavirus on business contracts we must take into account the fact that we are living and trading through extraordinary times. There’s no clear, standard answer to any of these questions at present. Our current circumstances are unique and there is little legal precedent for the situation presently unfolding. Every contract needs to be considered on a case by case basis, having regard to the health issues as they currently stand. It is therefore important to seek expert legal advice on your specific contracts before reaching key decisions in order to avoid potentially costly legal liability arising in the months to come.

Contact Emma Reed in our commercial department for further information about the effect of Coronavirus on business contracts on 0808 139 1606 or email her at [email protected]