Coronavirus: Commercial Contracts & Supply Chain FAQs

With self-isolation becoming a common phrase, and it becoming more and more apparent that everyday business activities are likely to be disrupted not only overseas but domestically in the UK, we are increasingly being asked how businesses can deal with the impact on their supply chain.

Even if you are seeing no significant impact at the moment, the more you can prepare now, the quicker you will be able to move when the need arises. The following FAQ addresses the key areas you should be thinking about in relation to your customer and supplier contracts. You can also find our quick-reference force majeure flowchart here and our quick-reference Frustration flow chart here. A force majeure clause protects a business in the event that it is unable to perform its contractual obligations as a result of an event outside of its control. Suppliers are keen to find out whether they will be able to rely on force majeure clauses if they are unable to supply their customers as a result of Coronavirus. Conversely, customers need to assess the risk of their own suppliers claiming force majeure protection.

When looking at the effect of force majeure on your contracts, we ask the following key questions:

1. Is there an express force majeure clause? Force majeure is not an automatic right, but will only apply if you have a force majeure clause or something equivalent in your contract. Look out also for wording talking about events beyond a party's reasonable control, or specific references to government actions, epidemics / pandemics or similar.
2. Is Coronavirus covered by the force majeure clause? There is no standard definition of what “force majeure” means in English law, so the meaning will depend on how it is defined in your contract. It may list items such as “epidemic” or “pandemic”, or may have general wording such as “causes outside the reasonable control of a party”.
3. Is the Coronavirus causing a breach of contract? It is not enough for your force majeure clause to include Coronavirus. If you or your supplier breach a contract, you or they are only protected by the force majeure clause if that breach is caused by the force majeure event. If performance is just made more difficult or more expensive, the majority of force majeure clauses are unlikely to provide protection.
4. Is the Coronavirus the only cause of the breach of contract? Depending on the wording of your force majeure clause, a party looking to rely on force majeure to excuse them from contractual obligations may need to be able to show that Coronavirus is the only reason they have been unable to perform their obligations, and that if it had not been for the Coronavirus they would have been willing and able to carry out the contract. For the majority of force majeure clauses, this is likely to be the case.
5. Was Coronavirus foreseeable, and does it matter?As for other elements of force majeure, this depends on the contract wording. Some force majeure clauses specifically exclude foreseeable events, and others do not mention this.  However, although earlier in the year there were suggestions that Coronavirus was foreseeable on the basis of SARS and other previous outbreaks, it is becoming rapidly apparent that this pandemic is an order of magnitude different in scale from any earlier outbreaks, and it seems unlikely that anyone could successfully argue that what we are seeing now was foreseeable.
6. What do you need to do in order to rely on the force majeure clause? There will often be a requirement to notify the other party or carry out other steps before the force majeure protection kicks in. Making sure you are aware of these requirements early on will put you in a better position if you need to exercise your rights at a future point. If you are expecting there to be an impact on your business, consider pre-emptive notifications warning your customers that there may be disruption in the future.
7. What are the consequences of the force majeure clause? Typically a force majeure clause will say that a party is not in breach of the contract if they fail to perform their obligations as a result of the force majeure event. However, the party that is not in breach may also have the ability to terminate the contract if the force majeure event continues for longer than a given period of time. Establishing what rights are available to you now will ensure you can plan properly for any prolonged period of disruption.

It will very much depend on the wording of individual contracts, but you may find that other provisions such as change control, change of laws, variation and similar may be helpful in establishing whether contractual rights can be changed or suspended as a result of Coronavirus. Specific types of contract (such as banking agreements) may also have “material adverse change” clauses that may be triggered by Coronavirus and its associated consequences. There is no implied principle of “Force Majeure” in English law. Put simply this means that, if your contract does not include a Force Majeure clause, you cannot rely on Force Majeure for protection. Where this is the case, however, your business may be able to rely of the principle of “Frustration”. Frustration occurs when a party is prevented from performing its contractual obligations for a reason that is both:­(1) entirely unforeseeable; and(2) the fault of neither party. The event must make the performance of the contractual obligations:

• impossible; or
• illegal; or
• radically different from the obligations contemplated at the time that the contract was entered into.

The frustrating event must also be so fundamental as to defeat the entire “commercial purpose” of the contract. Whether you are able to rely on Frustration will depend on the circumstances of each particular contract in dispute and it is generally something that can be difficult to prove in court, as the threshold to prove Frustration is extremely high. However it is worth noting that changes in the law, such as the government's emergency Coronavirus legislation, are likely to mean that Frustration is easier to claim where Coronavirus makes it impossible for you to perform your contractual obligations. For example, if a contract requires performance in a region that is subject to state-imposed lockdown then such a contract would likely be frustrated. There is currently limited case law on Frustration, but we envisage that it will be increasingly tested in the courts in more detail as the impact of Coronavirus takes hold and what has to date been deemed to be an unusual claim to bring successfully, could become more common. If you are successful in claiming Frustration then this will bring the contract to an end immediately. Money that has been paid under a frustrated contract is usually recoverable and any money still due to be paid will cease to be payable (taking into account the value of any goods/services you have already received).

However a caveat to this is that businesses should think carefully about the implications on the rest of their supply chains before pursuing a claim in Frustration. These are testing and unprecedented times for everyone and businesses should be thinking holistically about any potential damage that such a claim may do to goodwill with longstanding customers or suppliers, as well as reputational damage for the business itself, when this is all over. The disruption caused by the Coronavirus is likely to have implications that do not necessarily fall within the remit of force majeure, but that will have a significant impact on your business. For instance, where performance of a contract is more difficult or more costly, but still possible, the majority of force majeure clauses are unlikely to excuse performance. Ultimately, it seems likely at this stage that some businesses will fail as a result of the Coronavirus pandemic, as we have already seen in the recent collapse of Flybe.

It is therefore vital to plan ahead, take stock at an early stage, and ascertain what is likely to be critical to your business. For example, are you particularly exposed to being unable to move people or goods freely cross-border? How will your business continue to operate if your employees (some, a significant part, or even all) self-isolate? Are you taking steps to protect key personnel in your businesses? What will the post Coronavirus world look like for your business and will your management teams return to optimal performance? Keep in mind that many insurance policies have exclusions for epidemics and pandemics, for specifically named diseases, and for associated activities such as government quarantine protocols.

Insurance companies are already starting to restrict the cover they make available; for instance, many companies have said that they have decided to stop selling travel insurance in the short term. Many of our clients have found that they are uninsured for the losses they could face. As with the other aspects we have discussed above, it is critical to make sure that you know what your business's position is, so that you can assess risk and establish how best to manage it. Check your insurance policies as soon as possible. Each policy is different, so look at your specific policy wording. Our Head of Financial Regulatory Services, Adam Edwards, can advise on individual policy wording. Although it is theoretically possible for a court to order someone to comply with their contractual obligations, in practice it is very difficult, as the courts are typically unwilling to force someone to do something. This makes it important to be talking to your suppliers and negotiating a way forward that will work for both parties in the event that they are struggling to supply. Be prepared and plan ahead! Talk to your suppliers and customers earlier rather than later if you are concerned about business disruption caused by Coronavirus. Particularly where you have long-term significant contracts in your supply chain, the reputational risks of being unable to supply customers need to be managed early on.

Businesses should be engaging in contingency planning to deal with both the impacts on their own businesses and their ability to serve their customers. Can you dual- or multi-source products that are supplied by areas that are particularly badly affected? How will your customer contracts protect you in the event that your suppliers fail to supply? If a supplier declares force majeure, do you know whether you should or can declare force majeure under your customer contracts? Looking at the wider business continuity aspects, will your remote working capabilities enable you to engage with customers without travelling to their premises, for example via video conferencing? Equally, are you set up to be able to deal with a large number of your staff being unable to come into the office, whether due to actual illness or precautionary self-isolation? Do your existing remote working facilities have the necessary bandwidth to deal with large scale working from home over an extended period?

See also our Coronavirus: Q&A for Employers for further information on how to manage your workforce during the current crisis. Many commentators have suggested that the change to home working precipitated by Coronavirus, together with our increased awareness of environmental issues is likely to lead to more permanent changes in working practices.

Accordingly businesses need to consider how they will adapt to this new landscape, not only in terms of the technological practicalities, but also in terms of how their people are kept supported, managed, motivated and connected with less frequent in-person interactions. It becomes increasingly apparent that business disruption will be unavoidable in the wake of the continued spread of Coronavirus. Making sure that you are prepared ahead of time, that you know what your options are, and have a plan to exercise them, will enable you to be on the front foot as and when that disruption impacts your business.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.