CORPORATE / COMMERCIAL

Impact of COVID-19 on Commercial Contracts

In light of the escalation of measures to prevent the spread of COVID-19, some businesses may be unsure about what rights they may have with respect to ongoing contracts. They may experience disruption causing them to breach certain obligations or indeed suffer losses if another party can no longer fulfil theirs. Businesses should consider whether the following may be invoked and what steps they could take to mitigate any impact.

Force Majeure

Although force majeure is not implied as a matter of law, there may be a force majeure clause included in the contract. This may excuse a party from performing obligations due to unforeseen circumstances, suspend that party’s obligations for the length of time such circumstances exist or even allow the affected party or indeed both to terminate the contract. However, simply the existence of a force majeure clause will not be enough: whether or not a force majeure clause will apply in respect of COVID-19 will depend on how the clause is drafted, as there is no standard legal meaning. It may also be necessary to show that the obligations are impossible to perform, rather than just being unprofitable, hindered or delayed, and that there was no other cause of the breach.

 

Doctrine of Frustration

This allows a contract to be revoked, terminated or adapted where it is or becomes impossible to perform as a result of a situation fundamentally different from what was in the contemplation of the parties when the contract was made. There is a very high burden of proof and simply increased costs or delay is unlikely trigger the doctrine: performance must be impossible. However where an act becomes illegal, for example your business is no longer able to run as it is not an ‘essential business’ and work cannot be done from home, there may be a valid argument here.

 

Waivers & Amendments

Of course, it may be the case that in order to maintain a business relationship, one party decides to waive the obligations of the other for the time being, despite no contractual requirement to do so. Businesses should ensure to carefully word the waiver so as to avoid the assumption of a waiver of all obligations generally. Alternatively, if different terms are agreed or a settlement, it is important to document this, not only for good practice reasons but also as the original contract will most likely state that any variations are not binding unless in writing and signed by both parties.

 

If in doubt about whether a force majeure event applies or what relief may be available, please seek legal advice before acting or sending any communications.

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