As the COVID-19 outbreak continues to cause unprecedented disruption to the global economy, businesses need to think about how they will address the pandemic in contracts that they are currently negotiating.

Current projections of the scale of the pandemic make it difficult for a party negotiating a contract to argue that loss due to Coronavirus is “unforeseeable”. This makes it even more important that the contract spells out the parties’ intentions if the outbreak prevents performance.

Does the doctrine of frustration continue to apply?

When an event occurs after a contract has been agreed that prevents one party from fulfilling the contract, the court can relieve them from liability under the doctrine of frustration. While COVID-19 has been widely reported since December 2019, it has only recently triggered a number of events (e.g. travel restrictions and lockdown) that may prevent performance. Over the coming months, further action may have a similar impact. Parties should remember that frustration will not apply if the event could have been foreseen.

In Flying Music Company Ltd v Theater Entertainment SA and others [2017] EWHC 3192 (QB) a theatre promoter based in Greece argued that its contract with a live entertainment promoter to put on performances of the West End show Thriller Live during June 2010 had been frustrated due to civil unrest. The court held the contract had not been frustrated because:

“The parties both knew enough about the risks that this posed to the success of the production for it to be wrong, now, with the benefit of hindsight, to re-allocate those risks by releasing Theater Entertainment from its Contract obligations."

This is an important point if you are currently in negotiations. While the full impact of the Coronavirus pandemic is not yet known, it is unlikely that the court would intervene if further government action prevented performance of a contract that had been agreed at this stage of the outbreak.

What about including a force majeure clause?

Unlike frustration, there is no general rule that an event has to be unforeseeable for a force majeure clause to apply. Force majeure also has no generally recognised meaning, so it is up to the parties to properly define it (see our recent article).

This means that wording is often included to confirm that the force majeure provision can only be relied upon if the act or event could not have been foreseen by the parties. If you are negotiating a contract, you should review these provisions carefully and be clear about your ability to rely on them over the coming months.

Summary

By having open and clear discussions about the potential impact of the virus on performance, the parties can consider and agree additional protections.

This could include variations to key performance indicators (KPIs) or increased flexibility on delivery or payment terms.

At the very least these discussion will allow the contract to provide certainty about which party has assumed the risk. We are working with clients to help them through these difficult times. 

Matt Phillip is a senior associate in the commercial and international disputes team and a member of Shepherd and Wedderburn’s COVID-19 Advisory Group. For more information, contact Matt on 0131 473 5777 or at matt.phillip@shepwedd.com.

 

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