Is COVID-19 A Contractual “Get-Out-Of-Jail-Free” Card?

By Sue Laws

28.04.2020

COVID 19 is having a massive impact on supply chains and business continuity and, post lockdown, questions will be asked about who pays for this. The knee-jerk response of many businesses is that the pandemic is a unique, unforeseeable “Act of God” and that businesses which have furloughed staff or been forced to close during the lockdown or have had difficulties with their own supply chains or customers reducing purchase volumes, have no liabilities to or remedies against others for the consequent losses sustained. The reality is that on a case by case basis, businesses already adversely affected by this pandemic may find that contractual claims are being made against them or that they have a route to mitigate their losses by looking at their own contractual or statutory rights.

Key to the analysis which will be carried out is a bit of “jargon-busting” and debunking some commonly held views:

  1. Act of God” – This is not something which automatically applies to contracts. It is relevant for the purposes of force majeure clauses in contracts, which often cover what happens if there is an “Act of God”. It is not certain that a pandemic such as COVID 19 would be an “Act of God” which triggers a force majeure clause.
  2. Force Majeure” – This is not something which automatically applies to contracts. What is a force majeure event and what happens if a force majeure event occurs depends entirely on the relevant “force majeure” clause in a contract. “One contract may say that a force majeure event is an “Act of God” – in which case there would be arguments as to whether the pandemic was an “Act of God”. Another contract may list specific events and include epidemics and pandemics. Yet another may have a generic reference to “acts outside the control of a party”, albeit that this may not be interpreted as broadly as it looks. With any “force majeure” clause, you need to look at exactly how the contracts defines a force majeure event, and what it says happens in the case of a “force majeure” event (which may range from a temporary suspension to a right to terminate). These boilerplate clauses has been the subject of decades of litigation because they are so fact specific and dependent on the drafting of the clause in each contract – and their legal effect may in the context of COVID 19, not always be obvious. There is certainly no “one size fits all” which is a “get out of jail card” for COVID 19 disruption.
  3. Frustration” – This is a legal rule which does not have to be expressly set out in a contract. It has developed over many years to cover circumstances where nether party is at fault but the contract as intended by the parties cannot be performed because the circumstances in which performance is called for would make performance something radically different from what is set out in the contract. Again, this is very fact specific and involves a review of the circumstances in which the contract was negotiated and the contract as a whole, especially how risk was intended to be shared. Frustration may allow a contract to be terminated – and the parties then have to determine the economic effects of that termination. This is not a universal excuse for not performing a contract because of COVID 19, but may be a very valuable option.
  4. Illegality” – this is technically a subset of frustration. Businesses have been subject to an avalanche of government pronouncements about COVID 19, which have impacted on their ability to operate as normal. However, to be covered something must not merely be far more difficult because of these pronouncements – it must be impossible to perform without being illegal. Many cross border contracts may involve performance which is illegal in one country but not another. As well as being implied at common law, illegality may also be dealt with contractually – in international contracts there may be express clauses that deal with what happens if the performance of the contract would be illegal in a relevant country.

It may be tempting to put any analysis to one side and wait and see. However, a business may lose protection or expose itself to claims under force majeure and frustration by what it does (or doesn’t do) during the pandemic.

While the pandemic continues to rage, there may be a feeling that we are “all in this together” but the reality is that very soon there will be disputes about who bears the risk and cost of COVID related non- performance.

For More Information

For more information about the issues raised in this post, or if you would like to discuss your commercial contracts in general, please do not hesitate to contact Sue Laws or another member of the Duane Morris London team.