COVID-19: impact on trading contracts

The COVID-19 outbreak is causing great uncertainty for businesses and individuals on an unprecedented, global scale and creates clear challenges for businesses in fulfilling their contractual obligations within existing trading relationships.

Affected businesses should review their trading contracts to understand their rights and obligations and any relief that might be available in these circumstances. One issue of particular relevance is likely to be that of force majeure. Force majeure clauses are often included in trading contracts to provide for a relaxation of performance of contractual obligations where circumstances arise that are beyond the parties’ control.

As there is no implied right of force majeure in contracts governed by English law which are silent on the point, businesses will only be able to rely on force majeure clauses if they are expressly included in the relevant contract.

Will force majeure apply?

Force majeure clauses will not apply automatically to the current socio-economic situation in all cases.  Usually force majeure clauses are expressed to include specified events, such as pandemics, so your business should check its trading contracts carefully, because you may be able to argue that the outbreak constitutes one or more of those specified events. Other specified events which may be helpful in the current situation are: compliance with a law or governmental order, rule, regulation or direction; any action taken by a government or public authority, including imposing embargo, export restriction or other restriction or prohibition; and delays by suppliers or materials shortages. All of these are relatively commonly defined in commercial contracts as constituting force majeure events.

Additionally, in some cases force majeure clauses do not actually list specific situations as force majeure events, with the clause instead being left deliberately broad for brevity. Even where force majeure events are listed such clauses are often drafted on an inclusionary basis (i.e. they are given as examples of force majeure but do not exclude other events from being deemed to be force majeure events). The effect of these approaches is that if an event is not expressed in a force majeure clause by name it may, nevertheless, constitute a force majeure event if the event is one which is beyond the reasonable control of the parties. In these cases, there is likely to be greater scope for differing interpretations.

It would also be prudent to consider the wider guidance being issued by government agencies and international organisations, such as the World Health Organization, at the time a business seeks to rely on a force majeure clause because this sort of external evidence may be used to support, or defend against, such an action.

It is also common for force majeure clauses to impose requirements on parties intending to rely on them that they have taken reasonable steps to mitigate the effect of the force majeure event; not just that an event which constitutes force majeure has occurred. The wider context of the trading relationship, therefore, is always a key consideration in addition to the wording of the clause itself.

There are some situations that are likely to fall squarely within the bounds of a tightly drafted force majeure clause and give a party clear rights or obligations. However, as with most aspects of the Covid-19 outbreak, there are likely to be a number of situations that fall into grey areas. For example, when the UK government announced the nationwide household ‘lockdown’ (save for a small list of permissible outings), active construction sites were not immediately closed, but construction workers were not immediately re-classified as ‘key workers’. This led to an obvious conflict in the interpretation of force majeure clauses between construction companies and their sub-contractors.

Further considerations 

While it will likely be a relevant consideration in the majority of contracts, force majeure is not the only aspect to consider in the sorts of trading issues facing the UK supply chain presently. Examples of other issues to consider include:

• Where in the supply chain does your business sit? If your business has to suspend provision of services to customers and take the hit on decreased revenues, is this partly mitigated further up the supply chain by similar provisions in your contracts with suppliers, where your business is the customer?
• Are other termination rights included in the contract which could be relied on in the circumstances at hand (perhaps in a shorter timeframe than force majeure termination triggers)?
• Particularly in technology-heavy contracts, are other obligations or remedies available in relation to business continuity and disaster recovery?  And;
• Does the contract provide exclusivity of supply, or is the supplier free to supply its services elsewhere and the customer free to engage other suppliers who may be in a better position to perform? Are there any express costs implications of arranging alternative supplies?

Force majeure is likely to be one of a number of commercial issues to consider in a trading relationship in distress at this time, with the capacity for multiple issues to converge. Taking the example from the construction industry referred to above, in some cases legal arguments about force majeure were impacted, if not displaced, by the practical reality that a low turnout of construction workers on sites meant that site health and safety requirements were not satisfied and this was ultimately the reason for some closures. Contractual disputes related to force majeure will then have become one of a wider set of issues to work through.

As with all aspects of commercial law, the precise details of contracts in the context of their wider trading relationship and external circumstances should all be considered together to understand legal rights and obligations and how these play into the commercial reality of the rapidly developing global situation.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.