Welcome to the Madgwicks Lawyers Coronavirus and the Law Series. In this series, Special Counsel Catherine Ballantyne explores some of the legal problems stemming from the virus and its effects on businesses in order to shine light on the issues we will likely face in the coming weeks.
In this article, Catherine delves into the importance of the wording of the clauses in your contract and how it affects the clauses applicability in light of the coronavirus.
What is the relevant clause?
The relevant clause in the contract that could apply with regards to the coronavirus is a force majeure clause
- Force Majeure is the legal principle for when there are unforeseen consequences that prevents someone from fulfilling their obligations under a contract.
- It can only be used if there is a “force majeure” clause in the contract – they usually deal with acts of God (such as an earthquake), war, riots, government intervention and extreme weather.
- The exact wording of the clause is relevant as to whether it includes a public health crisis - even if a pandemic it isn’t explicitly contemplated, it may be arguable that other phrases used in the clause are relevant.
Why is the wording important?
Some contracts will specifically foreshadow an event such as the coronavirus, however many will not. In instances where a pandemic has not been alluded to, the wording of the clause will become extremely relevant in determining whether the clause applies.
Wording matters - “is prevented from” versus “is hindered from”: What happens in cases where it becomes too expensive to comply with the contract?
If the implications from the coronavirus cause it to be excessively expensive to comply with your obligations under a contract, you will need to review the wording of the force majeure clause:
- If the clause says “is prevented from” then for the clause to apply it must be impossible to fulfil your contractual obligations – merely being too expensive to do so is not sufficient.
- If the clause says “is hindered” or “hinderance”, then the Courts will look at whether the coronavirus had a significant impact or “hinderance” on the ability to comply with the contract. The contract being excessively expensive may be considered a “hinderance” and therefore the clause may apply.
Is the coronavirus an “act of God”?
This will be an issue which will no doubt be litigated before the Courts in the near future. It seems likely that given the unpredictable nature of the coronavirus that the Courts may find that it falls within the definition of an “act of God”.
What if there is no force majeure clause in my contract?
The legal concept of frustration (when the contract cannot be completed because of an unforeseen and uncontrollable event which is beyond the control of the parties) may apply in the event there is no force majeure clause in the contract. Stay tuned for part four of this series which will detail frustration.
Be very careful with the wording of any contract you are currently negotiating.
Seek expert legal advice with regards to your obligations under existing contracts.