Coping with COVID-19: 3 Legal Remedies for Contractual Liability Risks
March 10, 2020
By Gavin Giles, QC, Partner at McInnes Cooper,
Hilary Gilroy, Lawyer at McInnes Cooper
The global COVID-19 (a.k.a. Coronavirus or SARS-CoV-2) outbreak has implications for many commercial relationships, its evolving nature and potential scale creating anxiety and uncertainty as to its precise impact in virtually every sector. One uncertainty causing anxiety to run especially high: the liability risk of a commercial party’s inability to fulfil its contractual obligations because of COVID-19. And this risk is (like COVID-19) non-discriminatory. Service providers (such as construction contractors and financial services) might be unable to deliver contracted services at all, or within agreed terms, because their employees (or possibly those of their customers) are ill or quarantined. Manufacturers and processors (both of traditional goods and of crops and foodstuffs, such as licensed cannabis producers and fish and seafood processors) also face reduced access to raw material or heightened regulatory restrictions and resulting production delays and slow-downs. Here are three legal remedies that could offer relief to commercial parties coping with the impact of the COVID-19 outbreak on their ability to fulfil their contractual obligations.
1. Force Majeure
Force Majeure clauses are commonly included in commercial contracts, particularly in certain sectors, such as energy and natural resources. A party can rely on a Force Majeure clause when performance of contractual obligations is interrupted because of an unforeseeable event that is beyond the control of any contracting party. Depending on how the clause is written, Force Majeure could allow for suspension, delay or termination of contractual obligations for the duration of the event causing the interruption.
The effect of a contractual Force Majeure clause in any COVID-19 situation depends on a careful consideration of its specific wording. The clause may include such events as public health emergencies, pandemics, epidemics, quarantines or related governmental actions as potential triggers. If so, the COVID-19 outbreak, to the extent it affects contractual production and delivery, might be covered by such a clause. However, courts have required that the triggering event for a Force Majeure be a supervening event that is beyond the control of either party, that makes performance of the contract impossible, and that is unexpected and beyond reasonable human foresight and skill. The fact the COVID-19 outbreak is already known thus means there could be legal risks to reliance on a Force Majeure clause. Now is the time for commercial parties to review their contracts both for the presence of Force Majeure clauses and for their specific wording.
Apart from Force Majeure, commercial entities that find their production and delivery capabilities negatively affected by COVID-19 might alternatively be able to rely on the common law excuse of frustration. Frustration allows a party to set aside a contract where some event – such as COVID-19 – causes the contract to become something radically different from that which the parties intended when they made it. Such an event must truly be supervening in nature, and result in a fundamental change in circumstances that renders further performance of the contract either impossible or so radically different from that intended that the contract can be said to no longer exist or be binding.
Although COVID-19 has the potential to constitute a supervening event, only in very narrow circumstances would it alter the purpose of the contract so fundamentally that frustration could apply. In addition, a party could not successfully use the frustration excuse if there were some alternative way, such as outsourcing production and delivery, to achieve the initial intention behind the contract.
Related to frustration, a party can invoke the common law excuse of impossibility if performance becomes objectively impossible because of a supervening event that is beyond the control of either contracting party. That said, courts have frequently noted hardship, inconvenience, material loss or that the work has become more onerous than originally expected aren’t enough to escape liability, although there has been some recognition it’s enough if the affected contracting party can show the impracticality of contractual performance relates to extreme and unreasonable difficulty, expense or loss.
Impossibility of performance is likely the most favorable option for parties that become unable to perform their contractual obligations because of the COVID-19 outbreak, particularly those that cannot rely on a Force Majeure clause, or if the outbreak remains a consistent and foreseeable event. Although a triggering event is necessary to use the impossibility doctrine, unlike Force Majeure and frustration it does not require that the event be unforeseeable.
Please contact your McInnes Cooper lawyer or any member of our Litigation & Dispute Resolution Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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