The unforeseen outbreak of COVID-19 has resulted in confusion and panic. Businesses are left to make difficult decisions particularly where contractual obligations are concerned.
If you are struggling to meet your contractual obligations then the first place to look is in your contract.
A force majeure clause is a clause which expressly excuses one or both parties from performance of the contract in some way following the occurrence of certain events. The purpose of the clause is to protect parties from events which are outside of their control by excusing them from or suspending the performance of their contractual obligations. It may even provide for the parties to agree the termination of the contract.
It is important to note that force majeure clauses are not implied into contracts and as such you will need to check the exact wording of your contract.
A force majeure clause will usually be drafted either in a list format, specifically stating those events which are included. For example, it may include; “acts of God”, “any action taken by the Government” or “pandemics”. Alternatively, it will be a widely drafted clause which is open for interpretation but it would be important to note that certainty of terms is still required and you need to be certain of your rights under this clause before relying on it.
If a force majeure clause is expressly drafted in your contract then this could mean that you can avoid liability if you are unable to perform your contract as a result of COVID-19. It is important that you seek legal advice if you are uncertain because the burden of proof will be on the affected party to prove that non-performance was due to COVID-19 and also to prove that the clause covers COVID-19.
You should also note that you cannot simply walk away as more often than not, force majeure clauses will include notice provisions which you must adhere to.
In the absence of a force majeure clause then you may be able to rely on the doctrine of frustration.
Frustration applies when there are events or changes in circumstances which make it impossible for the parties to perform the contract or otherwise drastically change the contract such that the obligations are now radically different.
If a contract is frustrated then it effectively comes to an end.
In the event of force majeure or frustration you will be expected to use your reasonable endeavours mitigate the effects of the non-performance.
You will need to undertake a business continuity assessment and implement a proportionate plan in response. You should record or document your discussions in regards to alternative ways in which you can try to perform your contract(s). The fact that an alternative option which is available to you is more expensive does not excuse you from using that option if it is reasonable to do so.
Options such as stock-piling key materials or providing early delivery to customers should be considered where possible.