6 March 2020 by

Contractual obligations and coronavirus

With coronavirus continuing to become a more pressing issue, many will now be attempting to escape contractual obligations or seeking compensation/repayment of monies paid.

As such, it is especially important that individuals and businesses alike should now be carefully considering their contractual rights.

A clause commonly found in contracts is “Force Majeure”, which can excuse one or all parties from performance in some way under a contract, if an act or event occurs that is beyond the reasonable control of the parties and stops the contract from being performed. Examples of these events typically include a flood or fire. That being said,  cases have begun to appear in other jurisdictions in relation to Chinese buyers or those trading with them as a result of  coronavirus and restrictions put in place to protect public health.

If you are intending to rely upon a Force Majeure clause for non-performance, you must show that the event in question is within the scope of the clause and that the sole reason for non-performance of the contract was due to that event i.e. “but for” coronavirus, performance of the contract would have happened.

It is too soon for the courts to have considered this test in relation to coronavirus but they have previously considered the so called “but for” test. In one such case the defendant did not supply an iron ore cargo, as it was contractually bound, to the claimant. The defendant sought to rely on the Force Majeure clause in their contract arguing that a dam bursting at the mine supplying the iron ore had prevented the delivery. The judge decided that the defendant could not rely on the clause.  He looked at the previous trading history between the parties and found that the defendant had previously failed to make a delivery for economic reasons.  The Judge explained that “but for” the dam bursting they would more than likely still have not delivered the ore. The defendant could not therefore rely on the clause and was contractually obliged to make the delivery.

In the coming weeks and months it is likely that many will argue that they cannot fulfil their contractual obligations and refer to the Force Majeure clause, due to coronavirus, as the reason.  Whether they can or not, cannot be said with any blanket certainty at present. It will depend largely on the precise wording used in any given contract, the circumstances and even any action taken by government and other authorities.

As before with Brexit, for those currently or about to enter into contracts careful thought and professional guidance should be sought as to how to draft contract clauses (including Force Majeure) to maximise the chances that they will apply.

Parties entering into contracts should also ensure they consider how such clauses could apply and to clearly list the criteria for such; this is because it cannot be relied upon if the contract was entered into after the event that is the cause of the claimed Force Majeure.



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