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Can your business take the strain?

05 Mar 2020

The World Health Organisation declared the spread of coronavirus a “public health emergency” at the end of January.  Drastic economic consequences and stock market uncertainty are the by-products of addressing the practical challenges of understanding the development of the virus, and containing it.

The economic impact of coronavirus has seen businesses disrupted around the globe, and the impact on distribution and supply chains will be felt for some time to come.  So how might your business be affected, and what contractual risks might you face in the event that coronavirus starts to impact your business directly?  

The effect it has on your business will depend on a number of factors:
  • The nature of your business – are you supplying products? How and where are these manufactured and transported? Does any component rely on manufacturing in China? Is your business multi-faceted or does it rely on one main source of supply?
  • Where your business is conducted -  what geographical locations is your business provided in? Where are your customers based? How would your business be impacted in the event of restrictions on trade? Are your customers likely hold off purchasing your products or services in economic uncertainty?
  • Your position in the supply chain -  what is your exposure to customers in the event you cannot perform your contract? Is there a risk that your suppliers will be unable to perform their obligations? Can your suppliers be easily replaced? Do you have back up stock?
  • Provisions - what provisions do you have in place in the event staff cannot attend their workplace? Can you close certain elements of your business? Can staff work from home? Do you have multiple locations? Can you appoint temporary staff? 

Key contractual provisions

Given the projected scale of the outbreak, coronavirus is likely to have some impact on your business. It may prevent the performance of obligations under a contract, resulting in rights to terminate, postpone obligations or bring an indemnity or breach of contract claim.  You should take a close look at the key terms of your contracts from two perspectives: as the party in breach, and as the party whose supplier is in breach.

Force Majeure

A ‘force majeure’ clause enables a party to limit its obligations of performance under a contract where an event beyond its reasonable control occurs. The indirect effects of coronavirus could constitute a force majeure event given that they would be outside the control of either party. 

Under UK law there is no default force majeure provision, and therefore the rights a party shall have in the instance of a force majeure event will depend entirely upon the wording within the applicable contract.

The courts generally interpret force majeure clauses strictly, and as such they may be difficult to enforce if they don’t include wording such as ‘pandemic’, ‘disease’ or ‘government action’. If your contract includes a force majeure clause, think about:
  1. the wording and whether coronavirus may be caught under the drafting;
  2. what consequences such clause may provision for (eg. termination, extension, limitation of liability or an obligation to re-negotiate terms); and
  3. what notice requirements are included to enable reliance on such a clause.
 
Frustration

If force majeure cannot be relied on, you could turn to the common law doctrine of frustration.  A contract will be considered frustrated where it becomes impossible to perform (and not just inconvenient or no longer profitable). Whilst it’s difficult to demonstrate, if applicable it will by way of the operation of law automatically terminate the contract.  Which (if any) of your contracts could be frustrated?

Termination

If frustration or force majeure aren’t appropriate, look at the other termination provisions within the contract.  Can a party terminate the contract:
  1. for cause (ie. breach as a result of the non-compliance)?;
  2. for convenience, can a party exit the contract on notice? What would the consequences of this be?
  3. and do notice periods or remediation grace periods exist as a condition of such termination rights?
Notice

Notice may be required for reliance on a force majeure clause or termination provision, and it’s important to be prepared by familiarising yourself with the way in which notice is to be served/received, and to where.

Liability

Are caps on liability or indemnities included within the agreement which could limit or increase exposure as to risk in the event that obligations are not performed?

Insurance

What insurance provisions are detailed in the contract? Would loss be recoverable under the insurance provisions if non-compliance due to coronavirus resulted in a breach? Do you need to provide evidence of loss? If so, keep an audit trail and record of losses. Similarly, if you are the supplier and could be exposed, it is important to check your insurance policies to see what is in scope to manage risk.
 

Considering the impact of the virus on your business is a useful step in minimising your business's exposure. Hopefully your contracts will not need to be tested, but regardless of coronavirus, taking the precaution of reviewing your business's vulnerabilities is a useful exercise in itself.
 

Further reading

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