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COVID-19 and contracts

26 February 2020

Conferences, gigs, film shoots and other events have been cancelled because of Coronavirus fears and travel restrictions. With the virus not yet contained, businesses are having to look at what this means for rights and obligations under their contracts, as well as the more practical implications.

We are already seeing an increase in questions about what contracts say about cancelling events, and how to manage the fall out.

Most English law contracts contain a force majeure clause. This is a clause which spells out what happens if a party cannot perform their contractual obligations because of events outside their control. The clause may set out the types of triggering event, whether the parties are allowed more time to perform their obligations, who pays any increased costs, and whether there is a right to terminate the contract.

Just because a force majeure clause exists in your contract does not mean that it can be relied on. Determining whether you or another contract party may be able to rely on a force majeure clause to avoid or delay performing contract obligations because of the Coronavirus outbreak or associated travel and other restrictions, involves interpreting your contract.

Contract parties will need to look carefully at the contract wording to see what events are specified as force majeure. Much may also depend on how the virus is classified by the World Health Organization (WHO) and other organisations, and what restrictions are in place at any given time.

Force majeure clauses sometimes exclude events which could reasonably have been foreseen, and most require a party seeking to avoid or delay performance of a contract to show that it has taken reasonable steps to mitigate the consequences. It is not necessarily the case that increased costs amount to force majeure. Many force majeure clauses require contract performance not to be possible at all.

Looking at what the contract parties have actually done, what they could have done and what they should have done is thus an important part of the analysis.

Since force majeure clauses often set out what a force majeure event entitles you to do, or not to do, it is important to consider what your contract actually says in this regard. The temptation for businesses may be to rush into a particular course of action, but careful analysis of the wording of your contract is important to make sure that you are not jeopardising your position. Getting it wrong can have serious consequences, and may put you in breach of your contract.

Likewise, whilst discussions may well be an important part of mitigating the effect of the virus and related restrictions, and dealing with the practical implications, it is important to look at what notification and dispute resolution mechanisms exist under your contracts, and to be mindful of the possible need to keep your powder dry to protect your position in case a dispute does arise.

If your contract does not contain a force majeure clause, the English law doctrine of frustration may apply, although the bar to establish that a contract has been frustrated is high.

Frustration occurs where it is impossible for a party to perform a fundamental obligation under a contract, due to an unforeseen event, or makes a fundamental obligation radically different. When a contract is frustrated, neither party has to comply with future obligations. Determining whether a contract has been frustrated requires a careful analysis of what the obligations are, and why they cannot be performed.

If you would like advice on existing contracts, how to cater for the impact of Coronavirus in new contracts, or how to deal with force majeure claims, you can contact our specialist contractual disputes team here.

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