As Coronavirus Spreads, How Safe Is Your Supply Chain?

The developing pandemic poses concerns to all areas of business, and may impede parties from delivering on their contracts.

As coronavirus quickly develops from a local to a global threat, there are also increasing commercial concerns in relation to the ability of parties to perform contracts. In particular, the coronavirus outbreak is an illustration of the legal principles of force majeure and frustration which can, in the correct circumstances, excuse a party’s non-performance and/or lead to the early termination of a contract. Accordingly, does the coronavirus constitute force majeure or a frustrating event which will protect the affected party from a claim for damages?

John Warchus, Partner at Moore Blatch Solicitors, explains the circumstances in which an affected party may not be held legally liable for an unperformed contract.

Force Majeure

This defence can only arise if there is an express force majeure clause in place. If the force majeure clause refers expressly to “epidemics” or “diseases””, there is a reasonable chance that the virus will be seen as a qualifying force majeure event. Even if such wording is not present, many force majeure clauses refer to any circumstances beyond a party’s reasonable control and so it may also be possible to show that coronavirus should be seen as a force majeure event. Some commentators have suggested that given the outbreak of SARS a few years ago, it is arguable that the current coronavirus outbreak could be seen as foreseeable and therefore not a force majeure event, unless epidemic or disease is expressly mentioned.

In order for a party to rely on force majeure, it will need to show that:

  • Coronavirus comes within the contractual definition of force majeure; and
  • Coronavirus is the sole reason for non-performance; and
  • any notification requirements have been strictly followed.

Frustration

If there is no force majeure clause, then the only way an affected party can avoid legal liability is through the legal concept of frustration. This requires a party to show that it is either physically or commercially impossible to perform a contract due to a supervening event that has occurred since the contract was concluded through no fault of the affected party.

The concept of frustration needs to be distinguished from force majeure:

  • the legal test for frustration is far stricter than that for force majeure as it requires a party to show that it is impossible to perform a contract (or that the obligations have become radically different) due to the frustrating event; and
  • the legal effects are more dramatic: if it is shown that frustration has occurred, the contract is automatically terminated and neither party has to perform any future obligations to the other (although any contractual obligations that have arisen before the date of termination will remain enforceable).

Unfortunately, the case law on frustration is not as clear-cut as it could be. For example, although some cases refer to “commercial impossibility” of performing a contract as being sufficient to show that frustration has occurred, other case law makes it very clear that simply because obligations become more expensive (and even uneconomic) to perform, this is not sufficient for frustration. The courts in recent years have suggested that obligations need to become “radically different” after the relevant supervening effect for frustration to apply and so there is still room for debate as to exactly when performance moves from being more onerous to “radically different” or impossible.

In determining whether or not frustration has taken place, the court often has to undertake a complex assessment of all relevant circumstances, including:

  • the terms of the contract;
  • the factual background to the contract;
  • the parties’ knowledge and expectations about risk;
  • the parties’ view as to the ability to perform the contract in circumstances which are now said to amount to frustration.

Taking Action

Before a party asserts that it is entitled to claim force majeure or frustration, it needs to have a detailed understanding of all the background facts and details of the contract. Otherwise, an assertion of force majeure or frustration could be wrong with the result that the party making the claim is itself in breach of the contract, entitling the other party to terminate and claim damages arising as a result of that breach.

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