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Covid-19: Effect on Commercial Contracts: Q&A

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We have been advising on the fallout from the Covid-19 outbreak since early February and we have collated a high-level overview of some of our most frequent themes and queries in the list below. For support with the effects of Covid-19 on your business, please visit our hub or otherwise contact James Corlett or your usual Fieldfisher contact. 
 
Q. What is the contractual position if I'm unable to perform a contract due to COVID-19?
A. The general rule is that where a party does not perform its obligations under a contract, then this would give rise to liability towards the other party. In order to alleviate any potential liability arising, the affected party should consider whether it could rely on a material adverse change or force majeure clause or the doctrine of frustration. 

Q. Is COVID-19 a force majeure event?
A. This would depend on the drafting of the force majeure clause. Generally, if the clause is drafted broadly, it is possible that COVID-19 could fall within its scope. Some clauses may expressly reference 'pandemic' or 'epidemic'  which would increase the likelihood of COVID-19 constituting a force majeure event. 

Q. Would force majeure automatically apply to alleviate liability? 
A. Not necessarily. Mitigation of the event is important and you should check the provisions of the relevant clause as there may be a number of conditions precedent that a party must fulfil in order to  alleviate itself of certain obligations and/or liability. Common examples of conditions precedent include a requirement to notify the other party of the force majeure event (usually within a particular timeframe), also an obligation to take steps towards preventing/mitigating the effects of the force majeure event. 

Q: What if my contract has become less profitable?
A. Changes in economic or market circumstances affecting the profitability of a contract or the ease with which the obligations can be performed are not of themselves force majeure events.  
To be able to rely successfully on a force majeure clause, a business will need to show it is the event that is the primary cause of its non-performance.  The courts will not relieve the parties of what is merely a bad bargain.  

Q. Can I exclude all liability under the force majeure clause?
A. The force majeure clause is in effect an exclusion clause and therefore it would still need to comply with the Unfair Contract Terms Act ("UCTA"). Any force majeure clause that is drafted heavily in favour of one party or is particularly onerous towards a party could potentially (if challenged) be struck out for being unfair under UCTA 

Q. What if my contract does not include a force majeure clause?
A. The contract could potentially still be terminated on the grounds of frustration. Frustration is when something occurs after the formation of the contract, which renders it physically or commercially impossible to fulfil the contract. If a contract has been frustrated, it is automatically discharged and the parties are excused from their future obligations. The bar for this is very high and detailed analysis would have to be given to the precise circumstances involved. 

Q. Can I get a refund for advance payments made before the COVID-19 outbreak?
A. This will depend on the circumstances and you should review whether the contract covers this particular point. If performance of the contract has become impossible or illegal (eg. In contravention of a government order), then you may be able to rely on the doctrine of frustration. 

Q. Have the courts in England and Wales given any guidance in connection with legal issues arising due to the impact of COVID-19? 
A. The courts in England and Wales will not proactively offer general guidance as to the position they are likely to take on COVID-19 issues. Rather, they will always consider legal cases on their individual merits, on a case-by-case basis, by reference to the specific facts and matters in issue, including based on statute, established legal principles and case law from similar previous cases.

Q. Will English courts be sympathetic given current circumstances?
A. Generally, the courts have always sought to hold the contracting parties to exactly what has been agreed and not to seek to imply protection for matters that the parties simply did not make specific provision for and/or turned their minds to, even if that results in seemingly unfair or unjust outcomes in all the circumstances. This is unlikely to change and a thorough evaluation of the facts in question is key. 

Q. What practical steps should I be taking now in relation to existing arrangements?
A. You should review any contract that has been or is likely to be affected due to COVID-19. In particular, you should make note of any sums paid under the contract and to what extent has the contract been performed. You should also review any relevant clauses, such as force majeure or material adverse change clauses (if there  are any) to check whether COVID-19 would fall within its scope and whether there are any conditions precedent to fulfil in order to alleviate any potential liability. 

Q: What should we be considering for new agreements? 
A. we have suggested a number of steps you should give consideration to in respect of new arrangements: 
  • When is the contract due to be entered into and when is performance due? 
  • What is the realistic effect of Covid-19 on you and the counterparty and the ability to perform or benefit from the contract?  
  • Have you communicated with the counterparty and has it been discussed or agreed how risk or liability should  be allocated should the contract be delayed or not performed.   
  • Can the obligations be performed using contingency measures, such as working remotely?
  • Review the terms of the agreement, in particular give thought to whether the impact is fundamental and whether there are any relevant force majeure /material adverse change provisions in the contract, review whether they apply or whether termination or another form of relief is available. 
  • Is it possible for you or the counterparty to obtain insurance in the event that performance is delayed or prevented?


If you have any questions or concerns about your commercial agreements in light of the coronavirus outbreak, Fieldfisher's Commercial Teams would be happy to discuss your specific circumstances with you.
 
We are all navigating uncharted waters as business and society faces up to the impact of COVID-19.  We very much hope you and your loved ones remain in good health. 

 Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs.  Do get in touch with us if you would like to chat anything through.

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