Covid-19 – Impact on Commercial Contracts The impact of the Covid -19 (Corona Virus) is escalating day by day on our daily personal, working and business life. As it unfolds over coming days, weeks and months I feel sure it has the potential to significantly disrupt businesses even more than it is already doing so with many businesses such as none essential retail, gyms, bars and restaurants etc. now closed at the request of central government.
Many businesses use legally binding contracts in the sale, purchase and supply of goods and services, and in their occupation of commercial buildings such a retail, office and industrial premises. I feel sure that these business types as well as other businesses’ will be scrutinizing in detail their liabilities, rights and obligations under such contracts as business become increasing effected by the pandemic, especially if they are unable to perform the contract physically or financially.
Driving along yesterday I was pondering the situation on my way into the office to pick up some papers having made the decision to work from home, when from nowhere the term force majeure jumped into my mind. An interesting Latin term I have not really had to think about too much since we did a paper on it at University many years ago. What is force majeure in contractual terms, how could it assist in contracts in the current crisis and what practical steps could a business do about any contractual concerns due to the pandemic?
What is Force Majeure?
Force majeure meaning “superior force” is a term used in commercial contract provisions when unforeseeable circumstances prevent a party or parties from fulfilling their side of a binding commercial contract. Examples for force majeure include war, riots, earthquakes, lightening, blackouts, unexpected legislation or strikes, however what about pandemic as is the case presently.
If the word pandemic has been used specifically in the force majeure clause then the contract clause should cover the existing Covid -19 situation. However, what if the word pandemic is not in this force majeure cause, will the recent act of the government cover such clauses where it has made a request to close or restrict the business rather than the use legal powers under legislation? It remains to be the situation affecting business and the economy continues to unfold, if the government will use legislation. I feel sure it will.
A force majeure provision in a commercial contract usually allows a party to suspend or terminate the performance of its obligations when, as mentioned above, certain circumstances beyond their control arise making performance inadvisable, commercially impracticable, illegal or impossible.
Can contractual relief be obtained for Force majeure?
My understanding is that the onus is on the party wishing to rely on the force majeure clause within the contract (whether this is a commercial property lease agreement, sale or purchase of goods or services contract) to prove that force majeure event has stopped, restricted, held up or affected the fulfilment of the contact, subject to specific wording of individual contracts.
It remains to be seen how the specific events of this pandemic will be analysed in legal context of specific contracts. Will the government pass emergency legislation to assist businesses given the economic impact the virus will or may have on business(es) and the economy?
My understanding is that if a force majeure occurs, the general performance of some or all obligations within a contract may be postponed or suspended for a specific period, in this case until the virus is contained, or in some cases, however it may be prudent for the contract to be terminated completely.
What if no Force Majeure in Contract?
Force majeure is contract provision therefore if a no force majeure clause exists then an affected party will have to look elsewhere within a contract for possible routes out of the difficulties being experienced.
Practical immediate steps you can take if you are a concerned business owner?
I am no legal expert on force majeure, I have written this for discussion only. However given the current uncertainty of this pandemic and the potential negative implications that could occur as a result of the virus, it may be prudent for business owners who are party to contracts including commercial property leases, sale and/or purchase of goods or services contracts to:
· Review the wording of existing contracts where performance may be impacted by the closure or delay caused by the virus or government restrictions
· Seek advice of the wording if you are concerned, you may need advice before entering specific communications
· Open proactive communication between tenants and landlords where possible to coordinate efforts to mitigate any potential impact from the pandemic. Likewise, open communications between suppliers and/or customers on how you can work together to mitigate any disruption or loss.
I believe this is not the time for gamesmanship in business with such health risks and serious economic impact from the pandemic at stake.
I am commercial landlord and tenant specialist with commercial property, if you have any questions or concerns about your commercial property or a commercial lease agreement, please do not hesitate to reach out for a conversation.