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Covid-19 – Commercial Contracts

Covid-19 – Commercial Contracts
April 15, 2020 Lauren Smith

New tyres stored on a rack in a warehouseAs a result of the necessary measures put in place to deal with the outbreak of the Coronavirus many businesses are struggling to perform contractual obligations, through no fault of their own. So what happens to these commercial contracts where they simply can no longer be performed?

Some commercial contracts may contain a force majeure clause. A force majeure clause is designed to alter a party’s liability and/or obligation under a contract in the event extraordinary circumstances occur outside the parties control, which prevents the parties being able to fulfil the contract. For example a supplier may be contractually obliged to deliver 100 tyres to its customer by 1st June 2020 and if they fail to do so the supplier will face a financial penalty. Whilst on the way to deliver the 100 tyres the supplier’s lorry is damaged in an earthquake and all 100 tyres are lost. As a result the supplier can no longer supply the 100 tyres by the date required. A force majeure clause may state that in such circumstances the financial penalty is no longer payable by the supplier.

The Coronavirus outbreak is clearly something that is unlikely to have been considered by the parties at the outset of a contract. It is therefore possible that a force majeure clause within a contract may cover the pandemic and set out the impact this will have on the parties obligations. The possibility of seeking to rely on a force majeure clause should be considered on a contract by contract basis as not all force majeure clauses will be drafted in the same manner.

If the contract does not contain a force majeure clause then the parties may be able to rely on the doctrine of frustration. If a contract is frustrated it will become automatically terminated and the parties obligations under the contract will come to an end however this may not be the desired outcome of the parties.

A contract may be rendered as frustrated if:

The frustrating event could not have been reasonably contemplated by the parties at the time the contract was entered into;

– The frustrating event occurred after the contract was entered into;

– Neither party is at fault; and

– The frustrating event makes the performance of the contract, illegal, impossible or entirely different from what was contemplated by the parties at the time it was entered into.

The threshold to prove frustration of a contract is very high. Simply because performance of the contract has become more difficult or more expensive will not automatically render a contract as frustrated.

Should you require further advice or assistance as to the impact the Coronavirus may have on commercial contracts that you are party to please contact Lauren Smith on 01922 707048.