Unforeseeable and unavoidable: implications of coronavirus for business contracts

With the number of infections and deaths rising on a daily basis, and spreading to new areas of the globe, there is escalating global concern about Coronavirus. 

With countries increasingly introducing lockdown areas, restricted travel and the closure of schools, universities and workplaces, the economic impact of the virus remains difficult to gauge.   But it is clear from the impact being felt by the markets that the damage will be far-reaching and significant.   

For businesses, it is an alarming and uncertain time. Business contracts are inevitably being interrupted and delayed.  

Retailers, as well as hotels, restaurants and bars, will be hit hard, particularly in areas where restrictions on movement and close contact are put in place.  We saw examples of business closures in China during January and February such as Burberry announcing the closure of 24 of its 64 stores in the country.  Ports in China were also particularly badly affected, which is likely to be replicated elsewhere, and travel restrictions also impact upon industrial activity.  

In the circumstances, businesses affected will need to carefully review their contractual rights and obligations. For contracts governed by English law, this may well require particular consideration of the force majeure clause, if any, as well as business continuity and/or disaster recover obligations.

Force Majeure

A force majeure event is one that is unforeseeable and unavoidable, and not the result of either parties' actions, which makes it impossible for somebody to perform a contract. The clause allows the party unable to perform its contractual obligations due an extreme event to declare force majeure and be relieved from performing its obligations.  

Natural disasters, wars, riots, revolutions, explosions, strikes, and government actions can all be force majeure events.  

It is not a certainty that the outbreak of coronavirus, or the resulting government restrictions, will be covered.  It will depend largely on the specific wording of the relevant clause and it is likely that counterparties will seek to challenge reliance on such a clause.  

Many force majeure provisions contain non-exhaustive lists of the type of event covered.  Because not every possible event is specifically covered, where a dispute arises the English Courts will aim to interpret the applicability of the clause in light of the examples that are provided.   
It is not an easy decision to take given the consequences that it will have for business partners and therefore the impact it is likely to have upon those business relationships in future.  

Considerations

• Whether or not the outbreak of coronavirus is covered will depend upon the wording of the clause.  
• The other contracting party may resist force majeure and there may be resulting litigation. 
• From a commercial perspective reliance on force majeure may impact upon future business relations.  
• It is important to consider how a force majeure clause might interact with any business continuity and disaster recovery provisions.  
• It is important to check contractual notice requirements to protect against a technical challenge.  Where there is no force majeure clause, it may be possible in English law to argue frustration which could result in the contract being discharged and the parties released from future obligations.