Updated: Jun 26
A Review of the Implications of COVID-19 on Commercial Contracts
The COVID-19 outbreak has affected supply chains worldwide; As a result of the current pandemic, many companies and countries are having their vulnerabilities exposed. Businesses dependent on global sourcing are facing hard choices in crisis management amid the supply chain disruptions. Long stretches of empty supermarket shelves and a shortage of essential supplies to the medical sector in particular are the visible impacts to consumers of the global supply chain.
As of 11th March 2020, 75% of companies have supply chain disruptions and many businesses are planning to mitigate the impact of the disruption. Companies and sectors that rely on a limited number of trading partners are, in particular, facing challenges as a result of city-wide closures and quarantines. Furthermore, with almost 20% global reliance on the mass value of chains that have been built up in China, the focus is on the manufacturing sector. What is unseen, or the potential of the impact of such is the production stoppages in locations across China and other countries and the shortage of raw materials, assembling and finished goods for the open market.
Businesses dependent on global sourcing are facing hard choices in crisis management amid the supply chain disruptions and there is most likely going to be a massive restructuring of supply chains, particularly in technology and pharmaceutical industries.
What is Force Majeure?
The concept of force majeure clauses in contracts originates in French Law. It is a principle that the parties are free to determine at the time of agreement to establish the circumstances under which a party’s obligations under the contract may be suspended, or otherwise altered, due to events that can lead to early termination of the agreement without having economic or financial consequences.
Force majeure contract clauses excuse one party from fulfilling its contractual obligations where those obligations have become impossible or impracticable to perform, due to an event that the parties could not have anticipated or controlled. Common examples include: natural disasters, severe weather, government actions, war, terrorism, riots and strikes.
The language of the force majeure clause varies greatly with some requiring the performance of the contract to have been prevented by the event or performance being hindered or delayed.
The World Health Organisation (“WHO”) declared COVID-19 as a public health emergency of international concern on 30th January 2020 and a pandemic on 11th March 2020. The language of whether COVID-19 would influence the trigger of a force majeure clause within an agreement would depend on the language used within the agreement and the timing of the defaulting event which triggered the breach. For instance, if the defaulting event occurred after the WHO announced COVID-19 as a pandemic, insurers and opposing parties may argue the event was no longer unforeseeable as it is in the media and therefore potentially invalidate the use of force majeure for non-performance.
In the event of a force majeure clause being triggered, the legal issue of whether a party becomes excused from liability for delay or non-performance of its obligations while the event is ongoing is key. Usually, one or both parties may terminate the contract without penalty if the force majeure event continues for a certain amount of time.
Force Majeure under English Law
Unlike civil law jurisdictions, there is no implied application of the doctrine of force majeure under English law. There needs to be a force majeure clause in the contract, as it is not implied into a contract. It is instead applied by the English courts to apply to contracts strictly according to the wording of the agreement between the parties, therefore the drafting of this provision should be carefully reviewed to determine what is excluded. The courts will seek to enforce specific performance of a contract, therefore the first point to establish is whether there is a force majeure clause within the contract and whether COVID-19 is a force majeure event.
The fact that a contract has become uneconomic or commercially impractical will not be considered a force majeure event unless there is an express provision within the agreement for this if there is a lack of express provision for “epidemic” or “disease” in the agreement, the burden is of proof is on the defaulting party. In the absence of a reference to specific events, a party would have to rely on general contractual terms such as being beyond a party’s reasonable control. In some circumstances, the English law doctrine of frustration may provide relief where the force majeure clause does not. Considerations should be made to review existing agreements and terms and conditions to cover COVID-19 and other unforeseeable events.
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