2019-nCoV Coronavirus: what are the implications for your business?

Supply chain and commercial contracts

During a pandemic, a business may struggle to fulfil contractual obligations due to staff shortages or because their own suppliers are unable to meet contractual commitments. For example, during the 2019-nCoV Coronavirus crisis, a UK car manufacturer may be unable to fulfil a contract to supply cars as it is awaiting Chinese parts.

Businesses who think they might be affected by outbreaks such as the Wuhan virus should review their contracts and consider any steps they could take to minimise the chance of them being in breach of contract. This should include having an up to date business continuity plan with appropriate risk assessments and could also include the stock-piling of resources or taking early deliveries where necessary.

The end customer might make a damages claim for breach of contract, but if a force majeure clause is triggered or the doctrine of frustration applies, any claim might fail.

Force Majeure

Force majeure is an event beyond a party's reasonable control which could not reasonably have been anticipated or avoided. A force majeure clause excuses one or both parties from performance of the contract if certain events occur. Force majeure has no fixed interpretation under English law, so should be specifically considered in the context of each contract.

Businesses who think they could be affected by a pandemic or epidemic should review their current contracts to check if this is included in the definition of force majeure.

Any affected business should then consider the operation of the force majeure clauses. Some force majeure clauses may be triggered where the event either 'hinders' or 'delays' the performance of a contract, giving companies a breathing space. However, where a force majeure clause refers to an event 'preventing' performance, a company will have to show that performance of the contract has been made impossible (and not merely more difficult or slower) by the outbreak.

Finally, when entering new contracts businesses should consider whether to include force majeure clauses, appropriate to the type of business and locations in which it operates, that specifically include pandemics and epidemics. They should also include potential government reactions to outbreaks such as quarantine measures in large cities and the closure of public transport which might prevent a company’s employees from working and thus prevent the performance of the party’s obligations.

Frustration

Where there is no applicable force majeure clause, another avenue might be to invoke the doctrine of frustration. The doctrine says that a contract may be brought to an end where something unforeseen occurs after the formation of the contract (through no fault of either party) that has the effect of making it commercially or physically impossible to perform.

Whilst it might be possible to argue that a pandemic has frustrated a contract, the courts are often unwilling to find that a contract has been frustrated. Furthermore, frustration is permanent; both parties are excused from the contract, with no option for a temporary pause. Therefore, relying on frustration as a way out of contractual obligations should only be used as a last resort. The difficulties and unpredictability in trying to use frustration highlights why careful planning of contracts is so essential. Clauses specifically dealing with critical events such as pandemics are better than trying to use general law principles such as the doctrine of frustration.

What you should do

1. Check current contracts for force majeure clauses.

2. Carefully draft new contracts to include pandemics, epidemics and other crises that may effect the ability of your business to fulfil contractual obligations.

3. Review and update your business continuity plan.

4. Consider the terms and scope of your insurance cover, and

5. Consider whether your systems and employees could operate flexibly in the case of travel restrictions or other measures that might be taken by the public authorities.