LAW Understand obligations during pandemic disruption
Contracts and Covid-19 As Covid-19 continues its rapid spread throughout the globe, it brings with it unprecedented disruption to every aspect of our lives, both personal and business. While our health, undoubtedly, remains our number one priority, Covid-19 is also bringing about momentous interruption to our businesses. Government restrictions, travel restrictions, cancellations, supply, demand and labour shortages, are all having an adverse effect on most of our businesses. As a result, many businesses are unable to perform some or all of their existing contractual obligations, either because they or another party to contract has been impacted Louis Vouloukos by the disruption caused by Covid-19. But, is party to a contract excused from performing its contractual obligations because of Covid-19? In this article, we explore contractual terms and legal principles that may be available to excuse performance of some or all of your contractual obligations. Review your key contracts If your business is unable to perform its contractual obligations, begin by gathering and reviewing your key contracts to assess whether there are any contractual provisions that may be of assistance. Many, but certainty not all, contracts contain a “force majeure” clause. Force majeure clauses may excuse a party from performance of some or, less often, all of its obligations under a contract. “Force majeure” clauses are typically easily identified in a contract, but sometimes contracts contain other clauses that, while not specifically identified by a heading or reference to the term “force majeure”, contain language that can be characterized as a “force majeure.” Even if your contracts do not contain a force majeure clause or other analogous provision, you may be able to rely on the legal doctrine of “frustration.” You should also carefully look at the terms and coverage afforded to you by your business insurance contracts. We now explore each these areas in a little more detail.
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May/June 2020
Force majeure “Force majeure” clauses may excuse a party from performance of specific or, less often, all obligations under a contract where non-performance of an obligation results from circumstances completely beyond that party’s control (for example, because of “acts of God”) or upon the occurrence of certain specified events (for example, government regulation, strikes, labour shortages, war or terrorism). Some force majeure clauses may even list an event like a “pandemic”, or “epidemic” as a force majeure event, but that is not as common. Whatever language is used, the commonality among force majeure clauses is that they list events that are completely outside of a contracting party’s control. If your contract contains a force majeure clause, the next step will be to determine if the pandemic — in this case Covid-19 — falls within the language of the force majeure clause. If you are fortunate enough to have the words epidemic or pandemic listed, the clause may be applicable. If not, your force majeure clause may use the term “acts of God.” The words “acts of God” have been interpreted by our courts, and generally speaking interpreted as a (supernatural) event that is unexpected, unforeseeable and beyond either party’s control or foresight. Arguably, Covid-19 could be considered an “act of God,” but it remains to be seen how our courts would interpret such a phrase in the context of Covid-19. One thing is certain, however, and that is that each contract and each force majeure provision must carefully be reviewed and interpreted with reference to the entire contract as a whole. If the force majeure clause is applicable, a party would need to demonstrate that the force majeure event is the reason for the non-performance. There cannot be other reasons for non-performance, such as intentional delay on the part of a contracting party, to name but one example. In short, there must be a clear link between the non-performance and the force majeure event. Even if there is a clear link, if relying on a force majeure provision, you need to take all reasonable steps to mitigate (or lessen) the damages caused or to be caused by the force majeure event, especially in a case where only a specific portion of your contractual obligations is incapable of being performed. For example, a claim by a party that it cannot perform its supply contract because Covid-19 is an applicable force majeure event that is preventing the supply of an essential component that is needed to complete production of that
