Coronavirus and how it affects business contracts

Since the first known case was diagnosed in Wuhan, China, in November 2019, the outbreak of coronavirus has had far-reaching implications for people and companies both nationally and worldwide. On Thursday, 12th March, the World Health Organisation (WHO) declared the virus a pandemic, meaning businesses are approaching the unknown in the months to come.

About Jon Roberts...

Jon Roberts, who qualified as a Solicitor in 1986, has particular expertise in complex commercial disputes, civil fraud claims and construction adjudication work. He is also solicitor-advocate with full rights of audience in civil proceedings in the Higher Courts of England and Wales.

The construction industry has felt the impact of the virus, with contractors and consultancies having to cease operations and/or find alternative ways of working as the crisis continues. The impact of COVID-19 has also meant that businesses are having to consider their contractual obligations with other organisations and clients.

Jon Roberts, Partner and Solicitor specialising in dispute resolution at leading East Midlands law firm Nelsons, discusses what those who are struggling to fulfil contracts during this time of uncertainty should do.

What is the current Government advice regarding coronavirus?

Due to the nature of the COVID-19 pandemic, Government advice is changing on a day-to-day basis. On Monday 23rd March, Prime Minister Boris Johnson declared a lockdown across England and Wales, stating people could only leave their homes for:

•  Shopping for basic necessities
•  One form of exercise a day, during which you must stay 2m (6ft) away from anyone who isn’t part of your household
•  Any medical need/care for a vulnerable person
•  Travelling to and from work, but only if absolutely necessary.

The update left many construction companies confused and unsure whether they should down tools. According to the Office for National Statistics (ONS), there are 1.4m construction workers across the UK and, as it stands, companies are still allowed to continue working on sites nationwide as long as they are practising social distancing and following NHS guidelines.

What does this mean for business contracts?

Under English law, businesses whose commercial operations are affected by the coronavirus and have ongoing contracts are still obligated to perform the relevant business operations and may be liable if they fail to do so. However, there are two general exceptions that are relevant to the current circumstances and may be used to excuse a party from undertaking their commercial obligations:

1. Force majeure clause
A force majeure clause in a contract, if included, can potentially relieve a party from their contractual obligations in circumstances that are not under their control. Alternatively, it may alter their obligations within the commercial agreement. With regards to the coronavirus, a force majeure clause can be used by a party only when the virus is specifically stated in the agreement or if it falls under some general wording in the contract.

The party looking to enforce the clause must be able to adequately show that an event – e.g. the coronavirus – has prevented them from undertaking their obligations in a contract. However, the party must also have taken reasonable steps to avoid or work around the effects of the force majeure event, making their best efforts to undertake their contractual obligations and be able to supply evidence of this.

2. Frustration
The other exception is the doctrine of frustration, which may be relied upon by a party when there is no force majeure clause stated in a contract. If successfully argued, this may set aside commercial agreements due to unforeseen events that render contractual obligations impossible, or drastically impact the party’s main purpose outlined in the agreement.

Should I review my business contracts?

If your business has been impacted by the coronavirus, it is important to review the terms of your contracts to see if there is a force majeure clause and if, in the circumstances, it may be relied upon. This will depend on the wording of the clause. The contract should also set out the effects of invoking the clause.

If there is not an express force majeure term in the contract, under English law, it will not be implied into it. This is a good time for businesses to review contracts/standard terms and conditions to consider specifically including the coronavirus as a qualifying event for invoking a force majeure clause going forward.

If there is not an express force majeure clause, the business may be able to rely on the doctrine of frustration, as outlined above. However, there is a very high threshold to get over in order to successfully argue frustration, and each case must be looked at on its own set of facts. While COVID-19 will be a frustrating event, it must be considered whether it renders performance impossible, illegal or radically different from what was originally contemplated by the parties. What usually makes the claims unsuccessful is if it argued that it is uneconomical or more onerous to fulfil the contracts.

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