Coronavirus: Managing your Contracts and Costs

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26 March, 2020

With the unprecedented measures being put in place by the government to reduce the spread of the coronavirus pandemic, RPs will be undoubtedly be considering the risks of contracts being unfulfilled.

This global pandemic is having a huge impact on organisations of all sizes and is outside the control of RPs. Performing parties are now seeking to rely upon 'Force Majeure' clauses in their contracts where they are unable to perform their obligations under the terms of a contract.

What is Force Majeure?

English law will not imply the doctrine of force majeure into a contract. There needs to be an express clause detailing when force majeure will be applicable.

A typical force majeure clause will state that where a party is prevented from performing its obligations as a result of the occurrence of a force majeure event, the affected party will not be liable to the other for failure to perform its obligations as a result of a force majeure event. If the force majeure event continues beyond a certain period of time, one or both of the parties may be entitled to bring the contract to an end.

Effect of a Force Majeure Clause

A force majeure clause will aim to make it clear where the risk of a force majeure event will be allocated. If the risk does not lie with your supplier, it will sit with the RP as the customer. Therefore, if the clause removes the supplier's liability for failing to perform its obligations, then the RP will have to take the risk of the obligations under the contract going unperformed.

In some cases, this may not pose a problem and RPs may be happy for the coronavirus pandemic to pass and some services to be delayed. However where the RP is reliant on timely supply of goods or services, the use of a force majeure clause, can create real risks for RPs if contracts cannot be performed.

Points to Consider

If either party is considering relying on a force majeure clause, you should consider the following:

Does coronavirus amount to a force majeure event under the contract? You should review the clause in the contract to see whether disease, epidemics or pandemics are specifically listed in the force majeure clause. If not, you should consider to whether the current circumstances would be captured by another specified event, such as acts of state or government action.

Does coronavirus impact the parties' ability to perform the contract? If coronavirus does amount to a force majeure event, the party looking to be excused from performance usually also has to show that the force majeure event impacts its ability to carry out its obligations. There are typically three types of wording that may be used to indicate the level of impact required:

  1. The performing party is prevented or unable to perform the contract as a result of the force majeure event, in which case the performing party must prove that it is impossible (either physically or legally) to perform;
  2. The performing party is hindered, impeded or impaired in its performance; or
  3. The performing party is delaying in performing its obligations under the contract.

What mitigation measures need to be taken? Performing parties are required to mitigate losses. If they fail to do so, that failure, rather than the force majeure event, may be deemed to have prevented, hindered or delayed performance.

What notice is required? The force majeure clause will contain a notice provision which will usually be quite onerous. The clause should be reviewed to determine what notice is required.

Recommendations

We strongly recommend that RPs should urgently review their key revenue generating contracts, and those which represent material expenditure for the RP, in order to be able to understand the risks to which you are exposed.

The coronavirus has the potential to have a significant impact on the performance of contracts. Your options will depend on the terms of the contract and the specific facts of your case.

For more information contact Daniel Milnes in our Governance, Procurement & Information department via email or phone on 01254 222313. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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