Is coronavirus a force majeure event?

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Ailsa Charlton, dispute resolution lawyer at Muckle LLP, looks at how businesses might protect themselves from COVID-19.

 

With the coronavirus (COVID-19) outbreak spreading rapidly worldwide, all businesses are likely to be impacted to some degree. As the movement of goods and services, supply chains and company share prices are affected, does coronavirus constitute a force majeure event as far as your commercial contracts are concerned?

 

Force majeure clauses

 

The main contractual mechanism that a business should consider if it anticipates that it will have problems fulfilling its contractual obligations as a result of the coronavirus outbreak is the force majeure clause. This clause can protect a business if it is unable to perform its contractual obligations as a result of an event outside its control.

A supplier will need to consider whether it can rely on the clause if it is unable to supply products due to a problem with its supply chain.

A customer will want to ensure that the force majeure cause is sufficiently narrow that a supplier cannot rely on it to avoid liability for problems in the supply chain. So are you protected?

 

It’s the wording that counts

 

The force majeure clause may expressly define which events are covered.  Although unusual, this may be an exhaustive list, so that only those specific events will be a force majeure event.

It is unlikely that coronavirus is expressly stated as such an event currently.  The force majeure clause may have reference to epidemics and pandemics, but they are also open to interpretation so should be clearly defined.

It may be that the clause has a wider interpretation, for example “causes outside the control of a party, including…” followed by an illustrative list. Other events can be included in the definition if they are seen to be outside the company’s control.

 

Was it the only breach?

 

Even if coronavirus does qualify as a force majeure event, in order to rely on the clause, the event must not only cause the contractual breach, but must be the only cause of the contractual breach.  In other words, it must be clear that, if the force majeure event had not happened, the contract would not have been breached.

The effect of a force majeure clause also depends on what remedies have been set out within the contract. A clause will normally suspend the company’s obligations for a specified period of time and will remove liability for any breach caused by the event during that period. After that period of time, there may also be a right for the innocent party to terminate the agreement if the force majeure event continues.

 

Mitigating loss

 

It is vital that appropriate steps are taken to mitigate any loss that you are likely to incur. It may be that your business needs to consider getting goods or materials from another supplier, even if this is at an additional cost.

Purchasing an alternative product may mean that you maintain the sales and therefore limit the impact on your end profit.  If you have not already assessed the situation, businesses should act now and review their supply chains and legal positions.

 

Actions to take now

 

  • check with your insurance provider if your business has interruption cover and if the current circumstances are covered
  • map your supply chain to understand the journey that goods or materials undertake before they arrive with you
  • work with legal teams to understand any financial implications of not being able to deliver goods to customers or other businesses.

 

Actions for the future

 

In the longer term, it is unfortunately clear that outbreaks such as SARS and coronavirus are going to happen, and businesses need to have clear plans in place to deal with the potential supply and legal consequences.

This may include conducting a scenario planning exercise and developing action plans for future outbreaks. On the legal front, providing express provision for pandemics like coronavirus within the force majeure clause would be wise and it would be best to have a legal advisor review the terms.

This would also be a good time to consider alternative sources for goods and materials. It is better to be more prepared than your direct competition, which might even open up new opportunities when the next disruption comes around, alongside a force majeure clause that works to your advantage.

 

For more information or to discuss any issues your business is facing, please contact Ailsa Charlton on 0191 211 7735 or [email protected]