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Business discontinuity and COVID-19

Quarantine. Self-isolation. Lockdown.

In these situations, how can business carry on?

Many organisations will have dusted off business continuity plans. Others may be making them up now. Fingers crossed, they'll work and keep things ticking over.

Unfortunately though, it will be impossible for some business to continue and for some contracts to be completed. What, for example, of a job with a two-week performance window in March, requiring supplier delivery of equipment and personnel to Saudi Arabia?

Saudi Arabia has put in place a travel ban: it's impossible for that job to be completed.

Where does the supplier stand? Can it be sued for non-performance? Is it liable for damages?

Force majeure

The contract would be the supplier's first port of call.

Should there be one, a force majeure clause typically excuses performance of the contract following the occurrence of certain events; however, what constitutes a "force majeure" varies from agreement to agreement.

LOGIC's current General Conditions of Contract for Services (On- and Off-shore) — used by many oil and gas businesses as a template for contracting in the North Sea, at least — specifies a range of force majeure events, including "riot, war, invasion", "earthquake, flood, fire", and so on.

A pandemic is not in itself specified as a force majeure event; however, "changes to [or the introduction of] any general or local statute, ordinance, decree or other law, or any regulation or bye-law of any local or other duly constituted authority" is.

Thus, Saudi Arabia's travel ban would likely constitute a force majeure event.

The LOGIC standard is to excuse failure to fulfil any term or condition of the contract if and to the extent that fulfilment has been delayed or temporarily prevented by a force majeure event. As such, if our supplier contracted on this basis, it would not be liable for damages.

Again, though, the precise consequences of the intervention of a force majeure event will vary from agreement to agreement.

Frustration

If there is no force majeure clause, then our supplier might defend any claim for damages on the basis of the doctrine of frustration, if English or Scots law were to apply (it is possible that any other applicable law would have an equivalent).

The doctrine of frustration applies where a significant change of circumstance renders performance of a contract physically or commercially impossible, or makes the obligations that were originally undertaken radically different.

This change must be due to something outwith the control of the party seeking to rely on it. Lockdown caused by COVID-19 would likely be a "frustrating event".

When a frustrating event does occur, the parties are excused from further performance.

Insurance?

If, on the face of it, a party is liable for damages for breach of contract caused by something out of its control, it might be able to have recourse to any business interruption (BI) insurance policy it has in place. A note of caution, though – many BI policies will not cover disruption caused by pandemic interruption, so bear in mind exclusions will likely apply.

Review

It's always advisable to keep reviewing your contracts.

You may have framework agreements in place, and these effectively (much as the other party may object) give you an opportunity to seek variations before you accept another call-off.

When entering into contracts, seek exclusions or limitations of liability, and pay particular attention to any liquidated damages clauses.

And of course, taking this pandemic as a prime example, it’s easy to see just how important force majeure clauses can be.

Jody Mitchell

Partner Jody is a corporate and commercial lawyer, advising clients across a range of industry sectors. He advises on commercial contracts, including framework agreements, agency and distribution agreements, and collaborative arrangements.

Posted, 18 March 2020 by Jody Mitchell
Categories: Commercial contracts | Coronavirus | Coronavirus and corporate | Corporate