Mills & Reeve writes:
Coronavirus: liability under English law contracts
Although you may find that contractual provisions and insurance policies provide a clear route to protection, we are seeing situations that are complex and require careful thought as to the best overall approach.
Note that suppliers to UK public sector organisations may be able to benefit from special rules to support businesses during the crisis. These seek to avoid contract termination and maintain payment flows until normal activity resumes.
The contractual position in English law
English law does not allow commercial parties to get out of a bad bargain. A party affected by coronavirus would normally be required to perform its side of the contractual bargain and may be in breach of the agreement if it fails to do so. You may be able to bring a claim for damages against the other party if there is a breach of contract. You may also be able to terminate the agreement. However, you will need to review the agreement for obligations regarding notice. It is important to follow these carefully for the termination to be legally effective.
Are there any exceptions?
The following may provide an exit route for a party in breach:
- force majeure clauses: A force majeure clause usually specifies a number of events followed by the words “or any other causes beyond our control”. These clauses are read narrowly by the courts. Force majeure will usually operate where performance of an agreement has actually been “delayed”, “prevented” or “hindered” by the specific event. If you do decide to rely on the clause, you should pay attention to any obligations around the giving of notice to the other parties. The key message, however, is that just because a contract includes a force majeure clause it does not always mean that coronavirus will be automatically be covered. For example, the clause may not provide an answer if:
- it does not expressly: (i) refer to pandemic or epidemic, or (ii) have catch all wording, such as “or any other causes beyond our control” or
- performance of the contract has not actually been affected by coronavirus.
If the clause is used, but later turns out not to cover the situation you are dealing with, there may be a substantial damages award payable to the other party.
- Material change of circumstances: Your contract may contain a clause allowing a party to walk away in the event of a material change of circumstances, although these are less common. If included, these clauses tend to be heavily negotiated. It will be particularly important to review the clause carefully to assess whether it covers the situation faced.
- Change in law: In some circumstances a clause that excuses non-performance of the contract on the basis of a change in law may apply. This will depend on a legal requirement that prevents a party carrying out its obligations, such as a ban on travel. Again, it will be important to review the clause in detail to assess whether it applies.
- The doctrine of frustration: A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract. Where it applies, the doctrine brings an end to the contract, potentially with a return of sums paid subject to deductions for expenses. It is important to appreciate that frustration currently operates within narrow confines and successful application of this principle is rare. For example, a recent case involved an application by the European Medicines Agency to terminate a long lease because it had to move out of the UK due to Brexit was rejected by the court.
- Insurance cover: Many contracts require a party to take out insurance to cover particular risks. However, the risks insured tend to be precisely defined and it is possible that unforeseen problems like those arising from the coronavirus outbreak will not be covered by such policies.
A strategic approach to avoid liability
While an individual contract may provide a way of avoiding immediate problems, it is important to take a step back and consider your ongoing relationship with your commercial partners. It may be best to review how this particular agreement fits in with other connected arrangements. Maintaining a commercial relationship in the longer term may be more important than avoiding a temporary financial loss.
Key take away points
- Take time to think through your options: Although in an urgent situation the temptation is to act quickly, it is worth taking some time to think through your options first.
- Check your contracts carefully: Where contractual performance is affected, it makes sense to check contracts carefully first. A force majeure clause may appear to apply at first glance, but ultimately there may be uncertainty over whether a coronavirus issue is covered.
- Insurance: It is possible that your insurance policies may provide cover, and if you are called upon to make a payment under a contract, it would be worth exploring with your commercial partner whether their insurance policies partly or fully cover the loss. Coverage will depend on the policy’s specific terms and conditions and you will need to consider the policy’s notice provisions.
- Take steps to reduce exposure: Take steps to reduce any losses. Consider “calling a halt” to ongoing activity to prevent further expenditure or looking for alternative methods to access necessary supplies. Not only is this a way of stemming potential losses, it may also be a requirement if you are considering making a contractual claim.
- Work with your commercial partners: Contract law and insurance may help to limit your exposure. However, they may not provide a comprehensive solution to this kind of unforeseen and widespread crisis. Discussing options with your commercial partners to minimise losses and business disruption is often the best approach (although conversations at a commercial level will need to be carefully crafted so as to ensure that you do not compromise your legal position). If there are provisions in your contract to review progress through joint management meetings, this may be an appropriate context for reviewing any foreseen problems.
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