The spread of coronavirus is having a global impact on supply chains and demand for goods and services due to business interruptions, travel restrictions, and quarantines. This means that you or your suppliers may not be able to, or may find it very difficult to, carry out obligations under contracts.
Where this leaves you comes down to the wording of your contracts, and even if you’re not having difficulties yet, it would be prudent to check you’re clear on what they say. If the contract doesn’t assist, it’s possible that insurance policies you have in place may do; so remember to check these too.
Usually, you won’t be able to use an event like coronavirus simply as an excuse to delay your contractual obligations or increase your prices because your business isn’t as profitable. However, your contract may allow you to do this; an example might be a price adjustment clause that kicks in when certain events happen. In the absence of this, you may be able to cancel or delay your obligations under a contract via two potential mechanisms; establishing that a force majeure clause applies or that the contract has been frustrated.
Force majeure clauses
Force majeure clauses are intended to help parties where they cannot perform a contract, or their performance is hindered or delayed, due to reasons outside their control. A force majeure clause might allow parties to delay their obligations for a certain time, or cancel the contract altogether, when certain events happen (known as force majeure events). Whether coronavirus is a force majeure event will depend on the drafting of your contract and how much impact the virus is actually having on your business, and the position may change over time (including if, for example, the virus is officially declared an epidemic or pandemic in due course).
If you claim force majeure under your contract, bear in mind that there are likely to be notification requirements you are required to follow and you may be required to take steps to minimise your losses; these will be set out in the contract. Be careful – if you declare force majeure wrongly you could be required to pay damages to the other party.
Frustration of the contract
A contract may be frustrated if it becomes impossible to carry it out, or a party can show that their obligations have become radically and essentially different to what was intended when the contract was entered into. For example, if you need certain people to provide services at a certain date and they are not permitted to travel, the contract may be frustrated. The effect of frustration is that the parties are released from their obligations under it. You don’t need a specific clause in your contract in order to rely on frustration.
Speak to a lawyer if you are unsure about the effect of coronavirus on your supply contracts or other commercial contracts. For access to a specialist lawyer in a few simple steps, you can use our Ask a Lawyer service.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.