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COVID-19 – Force Majeure And Contractual Considerations

The coronavirus (Covid-19) has brought significant disruption to the economy and unprecedented circumstances for businesses that continue to evolve. With the introduction of further restrictions on the movement of people and commercial activity, businesses are struggling to fulfil their contractual obligations.

To combat the virus the Irish government has introduced new emergency legislation aiming to “flatten the curve” (The Health (Preservation and Protection and Other Measures in the Public Interest) Act 2020). This legislation will severely disrupt business in Ireland over the coming weeks.

Emergency Legislation to combat Covid-19

The Irish government has fast tracked emergency legislation in recent weeks and some of the notable restrictions and provisions include:

  • Travel restrictions to or from Ireland;
  • Potential travel restrictions from certain geographical areas within Ireland;
  • Businesses may be obliged to close in order to prevent, limit, minimise or slow the risk of infection;
  • Non-essential retail businesses have been forced to close such as bars and restaurants;
  • Business that remain open have to put in place procedures to safe guard their employees and the public from the spread of Covid-19 (e.g Social Distancing Procedures); and
  • Repercussions for breach of the new legislation by individuals or companies have been introduced, including fines and imprisonment.

Can My Force Majeure Clause Help?

A force majeure clause in a contract allows a party to suspend or terminate the performance of its obligations in certain circumstances.

The wording of the clause will determine whether a contracting party can suspend or terminate its contractual obligations.  Businesses should examine the wording of such  clauses in their existing contracts or terms and conditions. Potential wording which may trigger a contracts “Force Majeure” clause in this circumstance may be  epidemic, pandemic, disease, state of emergency.

A force majeure clause that consists of a “catch-all” phrase and does not list the triggering events is unlikely to be considered enforceable. An example of a catch all phrase would be “anything beyond the reasonable control of the parties”.

What If Performance Is Impossible?

If a contract does not contain a force majeure clause, a party seeking to suspend or terminate their obligations under a contract may seek to rely on the doctrine of frustration. Frustration occurs where a contract is incapable of being performed due to circumstances beyond the control of the contracted parties.

In light of recent measures introduced by the Irish government, a claim to suspend or terminate a contract due to frustration may be acceptable in certain contracts as the performance of certain contracts may currently be deemed illegal or impossible.

Obligation to Mitigate Your Loss

If you are seeking to rely on a force majeure clause or the doctrine of frustration, there is still a responsibility to try and reduce your losses, insofar as is possible. If you fail to perform some of your obligations under a contract which you could have performed and there have been losses as a result, you can be made liable for failure to minimise those losses.

It is important for businesses to examine all their obligations under a contract and ensure that they are not still bound by any ongoing obligations where a business thinks it can suspend or terminate the contract entirely.

Recently Agreed Contracts

Any contracts that have been entered into since the outbreak of Covid-19 are unlikely to be subject to claims to suspend or terminate under the force majeure clause or the doctrine of frustration as the contract has been entered into with the potential for a pandemic in mind.

A recently entered contract may however be deemed to have been be frustrated under certain circumstances, for example where the government has just classified a business as non-essential and ordered it to close.

Insurance

We advise all businesses to review the terms and conditions of their insurance policies to assess whether they may be covered for any of the losses suffered due to the Covid-19 epidemic. Due to recent epidemics such as Ebola and SARS, some insurers have excluded viral or bacterial epidemics from their standard business interruption policies.

Businesses must also comply with the insurance notification requirements of the policy. For example, some insurance policies will contain a notification clause providing circumstances that require notification in written form.

Practical Steps

  • Review all key business contracts, particularly contracts with large value or risk, strategically important contracts and main revenue earning contracts.
  • Reach out to suppliers, customers, clients and service providers and discuss the possibility of alternative commercial arrangements. It is advisable to discuss any changes to existing arrangements before they are implemented.
  • Maintain a record of advice received and government measures that have led to your commercial and contract decisions.
  • Carefully review insurance policies, particularly business interruption insurance policies. If you are entitled to claim compensation, your business should notify the insurance company as soon as the business becomes aware of any potential losses that have occurred or that are likely to occur.

For more information please get in touch with Sophie Quinn or your usual Whitney Moore contact.