To demonstrate just how globally interconnected the world has become, anecdotal stories have already emerged about Jaguar Land Rover now having to obtain parts from its Chinese suppliers via scheduled airlines and suitcases.

Closer to home UK contracting business are likely to face similar sorts of problems relating to shortages of parts and/or raw materials, and in many cases it will lead to a contiguous chain of associated businesses also being unable to perform their respective contractual obligations.

In theory, once a party is in breach of contract it creates the possibility of the other party being able to terminate for repudiatory breach, depending on the seriousness of the breach, and whether the contract provides for an opportunity to first remedy any breach.

As an alternative to the above, businesses with contracts containing a Force Majeure clause may have an alternative option.

Force Majeure

Force Majeure clauses are often found in well drafted commercial contracts and deal with the rare situation whereby one party’s ability to perform the contract becomes impossible.

Force Majeure clauses come in all shapes and sizes but a typical clause might say something like this:

Force Majeure Event: means any of the following and the effects thereof if and only to the extent that such event is not caused by, and the effects are beyond the reasonable control of, the affected party including: war or civil war (whether declared or undeclared) or armed conflict, invasion and acts of foreign enemies, blockades and embargoes; acts of Government or local authority or regulatory body; civil unrest, commotion or rebellion; any act, or credible threat, of terrorism; lightning, earthquake or extraordinary storm or weather conditions; nuclear, chemical or biological contamination; explosion, fire or flooding

Assuming a Force Majeure event is validly triggered, then the affected party is usually relieved from performance and liability for non-performance for the duration of the Force Majeure Event, subject to a duty to mitigate.

The Force Majeure provisions will also deal with requirements to give proper notice and, if the Force Majeure Event continues for a defined period of time, a right for the other party to terminate the contract on written notice. Other contracts might instead provide for compensation to be paid first with a long stop right of termination thereafter.

Using the above example, it is doubtful the Coronavirus outbreak per se would trigger a Force Majeure Event, however “acts of Government” preventing people movement could, depending on all the circumstances.

Depending on the nature of the business, sometimes it will make no practical sense to terminate a contract for Force Majeure (assuming the right exists) or for some other contractual right, especially where it's going to be difficult to find alternative suppliers.  If that is the case then the parties need to enter into an early dialogue in order to seek a mutual and pragmatic way around the problem.

Frustration

The doctrine of frustration provides that a party can be discharged from its contractual obligations if it becomes impossible to perform the contract or make performance radically different.

One rarely sees the doctrine of frustration being invoked, not least because most well drafted commercial contracts will expressly provide for unexpected events through the use of Force Majeure clauses.

If frustration is successfully deployed then the uncoupling, together with any compensation is provided for through the Law Reform (Frustrated Contracts) Act 1943. In short, the Act provides for recovery of monies paid under the contract before it was frustrated, subject to allowances for expenses incurred by the other party.

Insurance

Standard business insurance doesn’t tend to include business interruption especially for pandemics such as Coronavirus. Instead, it typically only covers physical damage to business premises.

Businesses looking to secure insurance cover for business interruption as a result of the Coronavirus may now struggle to get extended cover, or if they can, then premiums are likely to take account of the increased risks.

Comment

On the basis that economic activity in the UK might get worse for the foreseeable future, then as part of any contingency planning businesses need to review their commercial contracts, take legal advice (Force Majeure and frustration are challenging areas of law) and consider opening discussions with contracting partners.