Businesses facing severe interruptions as a result of the COVID-19 outbreak are increasingly looking for answers to questions: What if my supply chain is interrupted? What if I’m unable to fulfil my own contractual obligations? And am I sufficiently covered for these scenarios? This post will seek to answer those questions and take a look at force majeure and other factors as key components of commercial contracts that can protect your business.
Where do you stand if you or your supplier is unable to carry out contractual obligations?
Your legal rights and your liabilities, as well as that of your supplier, will be specifically outlined by the contract itself. You will be obliged to carry out your contractual duties, whether that’s providing goods or services, as stipulated in the contract. If you fail to carry out your duties as detailed in the contract, it is possible that you will liable for a breach of contract.
However, due to the unforeseen impact that travel restrictions and government guidelines are having on businesses, there are potentially two provisions that will make you exempt from your contractual duties: force majeure and contractual frustration.
What is a force majeure clause? And how could it help?
A force majeure clause will specify in your contract how parties should handle not being able to fulfil their contractual obligations due to unforeseen events that are out of the parties’ control. Force majeure clauses can differ from one contract to another, specifying proposed next steps for the parties involved as well as what will and will not constitute force majeure.
When reviewing force majeure clauses in your contract, consider the following:
- Is a pandemic or epidemic covered as part of the clause?
- If a pandemic or epidemic is not specifically mentioned, would your circumstances be covered by more general wording? For example, is it instead covered by “government action”, “crisis” or other political interference language that can be used in force majeure clauses?
- Do your circumstances satisfy all the requirements to constitute force majeure?
Keep in mind that even if you are covered by this type of clause, you will also need to establish that the current pandemic has rendered it impossible for you to carry out your contractual obligations. This could be, for example, that your staff were unable to work, and the products required could not be sourced as a direct result of measures put in place by the government in the wake of the COVID-19 pandemic. To rely on force majeure, you must be able to also prove that you took reasonable steps to avoid the breach from occurring.
What happens if you’re able to rely on force majeure?
If you are able to establish force majeure, then the affected party will be exempt from carrying out most, if not all, of their contractual obligations. Often, this means that you will avoid termination of the contract by default. However, if the current situation develops and there is a prolonged period of force majeure, it is possible that you and/or other parties involved in the contract will have the right to terminate the contract.
In prolonged periods of time where your supply chain could be affected, it’s sensible to keep in close communication with the parties involved to determine whether the terms of the agreement should be renegotiated. Consider getting legal advice before renegotiating the terms of your contract to make sure you know what your rights and liabilities are, and how best to move forward (you should also consider getting commercial legal protection insurance in place).
What if there is no force majeure clause in your contract?
If a force majeure clause has not been used in your existing contracts, consider the doctrine of frustration and whether this applies to your circumstances. Contractual frustration specifies that a party is absolved from their contractual obligations if a change of events makes it impossible for the parties to carry out their obligations, or if the change in events would render the performance of the contract radically different. This narrow provision makes it difficult for businesses to call on the doctrine of frustration, but not completely impossible.
Make sure you seek legal advice when interpreting contractual frustration – the details, as stated in the Law Reform (Frustrated Contracts) Act 1943, make it difficult to rely on. But in the current situation of the COVID-19 pandemic, it is certainly worth considering, as the scenario of parties being subject to a government lockdown may make it impossible to perform the duties of a commercial contract.
What else can you do to prepare?
- Review your business insurance policies to see whether you’re covered. Check that your business interruption insurance covers you in the case of a pandemic. If it doesn’t, contact your insurer immediately to see if you’re eligible for additional cover, but keep in mind that insurers are likely to hike prices given the current situation.
- Get expert commercial legal advice so that your contracts can be thoroughly reviewed. This will help you know your rights and liabilities and prepare you for whatever may come your way.
- If your contracts include a force majeure clause, ask your legal advisor to clearly explain whether it protects you from disruptions as a result of the pandemic.
- Get in touch with all parties named in the contracts. Try to get more information on their current position, whether they’re still fully operational or whether they are likely to run into problems. This will help you identify whether you will need to renegotiate the terms of your contract to keep your supply chain moving.
With more and more information being announced every day in relation to the COVID-19 outbreak, it’s worth making sure you’re prepared for whatever may be thrown at you, and your business. Take the steps above to protect your supply chains and get sound legal advice where possible.