Going viral: Coronavirus Influence On Contractual Obligations

As a result of the coronavirus outbreak that originated in Wuhan, China, several regions have announced travel restrictions resulting in severe disruptions particularly in supply and distribution industries resulting in many companies being unable to fulfil their contractual obligations.

KEY TAKE OUTS:

• Coronavirus outbreak has infected contractual obligations worldwide.
• Force majeure clauses in contracts may allow parties to avoid their contractual performance obligations.

Recently, the World Health Organisation (WHO) declared the coronavirus outbreak a global health emergency.

Consideration is required to be given how this pandemic affects parties to a contract and how the events and circumstances they are faced with can fall within the operation of a force majeure clause so as to delay or absolve the liabilities of the affected contracted party.

A force majeure clause provides for what happens in the event of an event beyond a party’s control after having entered the contract. Generally, these clauses apply to events that are outside the scope of a party’s control such as natural disasters, war or industrial action. This type of clause can provide for varying consequences other than a discharge of the contract and can include extensions of time or variations to the contract.

A force majeure clause aims to keep the contract alive but if the clause in the contract does not stipulate the nature of such events, the Courts will apply the presumption that a force majeure event is restricted to an event that arises without the fault of either party.

A party seeking to invoke the force majeure clause is required to demonstrate that there are no alternative means for performing its obligations or that it has take all reasonable steps to avoid the operation of the clause.

As the coronavirus is a recent outbreak, it is unlikely that a contract will specifically refer to it as a reason to invoke the force majeure clause in a contract. However, it is possible that in circumstances where performance is prevented by the coronavirus, that this could be a potential avenue of relief from contract terms. Whether the claim is for an extension of time, termination of the contract, adjustment of price or otherwise, it is necessary for a review of supply contracts to be carried out. It is equally important to be able to assess the validity of any notice of force majeure received from counterparties. Each force majeure clause is required to be considered on its own merits and with regard to the party’s individual facts and circumstances.