We know today that the outbreak of COVID-19 has a vast impact on international and domestic trade and services. In only five months after first case reported in Wuhan, China, in December 2019 we could observe the rapid spread of the disease around the globe. The governments decided to take emergency measures to stop the escalation of the virus by limiting or banning travels outside their own countries, requiring citizens to stay at home unless it is absolutely necessary to leave the house or asking businesses to let the employees working from home, if they are only still allowed to operate.
It was foreseeable that such measures, quite similar in result implemented across the world, will cause inevitable operational disruptions, breaks in supply chains, leave businesses short-staffed or temporarily closed.
The question we will want to address in this article is what can possibly happen with commercial contracts governed by English and Welsh law if the performance of obligations arose from agreement is no longer possible under the given circumstances.
There are three legal means available we would like to shortly discuss and outline possible scenarios and solutions linked with each of them. Therefore, we will want to focus on:
The force majeure is a clause adopted by the parties to the contract that gives them possibility not to perform their contractual obligation if it becomes impossible due to occurrence of a certain defined event. The prerequisites depend on the terms, language and used wording in the clause. As such its effect will be this stipulated by the contracting parties.
The clause should provide a list of defined events that constitute a force majeure event. If such event occurs, it will be a first step determine if such occurrence will justify non-performance. It can be, for instance, an industrial action, war, riots, floods, fires, acts of any governmental body, terrorism or epidemics.
The principle of freedom of contracts can be however a double-edged sword if the event is not expressly defined or listed, it cannot constitute force majeure since the provision is purely contractual. Some contracts, in particular governed by US laws (which is not subject of this article), adopt so called ‘Catch all clause’ that could allow not only expressly defined but also similar events to justify non-performance.
Having this in mind, the party that wants to rely on the clause should first establish if the force majeure clause exists in the contract. Although its name or title may be different, since the content, not the heading is what we should be looking at.
After that the party should consider whether the event that occurred fall within the contractual definition of force majeure as set out in the contract. Moreover, it has to establish whether the occurrence of that event had an impact on the party’s performance of its obligation and whether it was beyond control of that party.
This is however not enough since the party should use all reasonable endeavors to avoid or at least mitigate the effect of that supervening event or its consequences. At the end, if all the questions are addressed positively, the company should check if the other party was properly and validly notified about what happened.
As mentioned above, the effect of the force majeure clause will depend on the terms of that clause, however the possible scenarios are as follows: it can suspend the performance, excuse liability for non-performance, but can also terminate the contract or prompt parties to re-negotiate the terms.
It is important to note that the answer for the question whether Coronavirus constitute a force majeure event is in the contract. If the clause lists ‘epidemic’ or ‘pandemic’ as the supervening event it may have an impact, however we should also check whether it made the obligation impossible to be performed, if this was foreseeable at the time when parties concluded the contract and also if the party mitigated or could reasonably avoid or mitigate the effect of that event. Not only the substantive, but also formal requirements should met, so for instance proper notification to the other party of the contract.
One more comment should be made at that point, since some of the clauses may require that the event is not only beyond (reasonable) control of the parties, but it must be ‘unforeseeable’ (unforeseeable circumstance) when parties entered in to the contract . The question may therefore arise for contracts concluded after December 2019 whether the impact of Coronavirus could be reasonably foreseen. It may be also required to address when the pandemic of COVID-19 started in the UK further to rely on force majeure clause.
The force majeure being a contractual remedy and common law doctrine of frustration are two different legal means and the last one emphasizes effect of the event on the performance. If the performance of the contract has become impossible due to events beyond the parties’ control, it can be frustrated. The law does not require any specific clause to be adopted to the contract what was the case in force majeure events.
The frustration occurs when (1) without default of either party it is impossible to perform the agreed obligation, (2) the mutually agreed purpose of the contract became impossible and (3) in case of a significant change to a mutually agreed state of affairs .
It may be the case where due to circumstances it is no longer legal to perform the contract when the law changed between the conclusion an performance or where its subject is destructed, for instance when the expected event is canceled.
If the Court is to decide if the contract is frustrated, it will have regard to different factors, like terms of the contract, the contracting parties’ knowledge, expectations or assumptions at the time when the agreement was concluded or nature of the supervening event.
The consequence of frustration is the contract being discharged.
Supervening illegality is sometimes considered as type of frustration, where the English law-governed contract is discharged if its performance becomes illegal by virtue of English law.
The performance as such cannot be simply less convenient or more difficult, it has to illegal. This clear distinction suggests that probably it will not be a widely applied remedy for contracts affected by Coronavirus if the contract is governed by English and Welsh law and is performed in England or Wales.
However, it may be the case where an English law-governed contract is performed in a different country, for instance in Italy, where the performance may be subject to that country’s legislation. As an effect its performance may no longer be possible due to that legislation being in force due to Coronavirus crisis. There is a common law rule that says that the contract will not be enforced, even if lawful with compliance to applicable law, but when prohibited in place of performance (Ralli Bros v Compania Naviera Sota y Anzar [1920] 2 KB 287). The rule is controversial and not widely adopted and it may be necessary to examine your individual case to establish if it applies to your contract.
No matter if the contract contains force majeure clause, complies with frustration or supervening illegality doctrine requirements, it is never automatic that the party is freed from obligation. There is always an economic interest behind the commercial agreement and it can be anticipated that the affected party will want to dispute the non-performance.
We strongly encourage you to contact our IMD Corporate team on 0330 107 0106 if you feel that the above scenarios may affect you or your company
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Talk to us today 
0330 107 0106
CONTACT US TODAY