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What effect may Coronavirus have on commercial contracts?

A case study

Take, for example, a supplier of machinery in the UK. Can that supplier be excused from delivering goods to its end customer if an essential part of that machinery cannot be obtained because of the shutdown of a factory in China?

The fundamental principle of any commercial contract is that the parties are required to perform their obligations or run the risk of breaching the terms of the contract. That means that a supplier of the machinery must deliver the goods or face a claim for non-delivery from their end customer.

The exception to the rule

The key exception to this general principle is the operation of what is commonly known as a force majeure clause in the contract.

A force majeure clause is commonly found in most commercial contracts. Typically, it sets out how the parties’ obligations are affected by an event that affects one of the party’s ability to perform their obligations in the contract. Each clause will need to be carefully interpreted, as there is no “one size fits all” standard wording. The critical issue facing our hypothetical UK machinery supplier is whether an epidemic/pandemic of this nature causing a factory shutdown is expressly or impliedly covered as a force majeure event in the contract. If so, our machinery supplier may be off the hook. If not, all may not be lost, since there may be a general “catch all” force majeure clause. Typical wording would be something along the lines of “any other events, circumstances or causes beyond a party’s reasonable control”. The shutdown of the Chinese factory may fall within the scope of this clause. Finally, some force majeure clauses contain “political interference” language. For example, if there has been a government direction or administrative action preventing performance, e.g. the importing of goods from China, this may provide sufficient grounds for our machinery supplier to challenge any claim for breach of contract.

Unfortunately for our hypothetical machinery supplier, even if the Chinese factory shutdown is a force majeure event, that may not be the end of the matter. They would still need to prove that the epidemic (and, more importantly, the resulting inability for them to source the part from China) made them unable to supply their machinery to the end customer in the UK.  Again, the precise wording of the force majeure clause will have to be carefully examined. For example, some force majeure provisions require subsequent performance to be “impossible”. If the factory in China is the only supplier of the particular part in the entire world, our UK machinery supplier may be able to breathe a sigh of relief. If that part can be readily sourced, albeit at a significantly higher price from an alternative manufacturer, the force majeure clause may not save the day. Performance is not “impossible”. It is simply more expensive. It all depends on the particular facts in the context of the particular wording of the clause.

Further information

As the Coronavirus spreads rapidly across the globe, commercial organisations should be aware of the how the epidemic may affect their commercial contracts and relationships.

If you are unsure and want to review your commercial contracts, contact Gordon Deane or Alan Gilfillan who will be able to advise on what steps can be taken to protect commercial interests.