Covid-19 – It’s Time To Check Your Contracts

The coronavirus outbreak has undoubtedly had a widespread impact on businesses worldwide. From closures to unemployment, the ramifications of the virus have been frightening. However, by taking the time to check your contracts, you may find that there are options to help you safeguard your business and mitigate losses.

What is the ‘force majeure’ clause?

According to crestlegal.com:

A force majeure clause sets out the rules which applies, if an event outside the control of the parties to a contract, stops a contract being carried out

This clause essentially details the rules for when an event occurs that is outside of the control of the involved parties. In such a case, the contracted parties will normally no longer be legally obligated to fulfil their obligations set out in the contract. If a substantial period of time elapses under such conditions, the parties may also be able to end the contract early.

By detailing what will occur when such an event takes place, the force majeure clause provides the parties involved a degree of assurance. 

Coronavirus and the force majeure clause

It is important to understand the language used in the force majeure clause. According to Venable, restrictive language (for example it is “impossible” to conduct business) may mean that the clause does not apply in a situation where you may think it would. If a party can prove that they can still conduct business, albeit in a limited fashion, then the contract needs can still be met.

With this in mind, you should take the following into account.

Does the coronavirus event fall under the force majeure clause?

It is worth checking what is specified in your contract’s force majeure clause. If events such as an epidemic or pandemic are listed, then you will be covered under the clause. If not, you are not completely out of luck. Government conditions, such as restricting travel to work, may be included in the clause.

Moreover, the umbrella term of an ‘event beyond the reasonable control of the parties may be used. Under such circumstances, the force majeure clause likely applies.

The outcome of the force majeure clause being triggered

As mentioned previously, the conditions which may cause the force majeure clause to be triggered are dependent on the wording of the contract. If force majeure is brought about, you will want to investigate the resulting financial implications.

If one party wants to use force majeure, the other party will want to take steps to mitigate financial losses. Therefore it is vitally important to precisely follow the procedure of force majeure, ending the contract for example, to avoid miscommunication.

So what now?

The best place to start is by reviewing your contracts, checking to see if your business can still perform its contractual obligations. If this is not possible, then you will be able to put a plan in place to reduce the financial implications of the virus.

Once you understand your position, it’s important to consider the following.

Think about your insurance cover

Your insurance policy may cover events that fall under force majeure. In light of this, it is worth reviewing your policy to see if you may be able to receive compensation to cover your losses. Always make sure to comply with the time-frame requirements of your policy.

Consider your customers and suppliers

Under these strenuous circumstances, a pragmatic approach to business relations with your customers and suppliers is appropriate. Whilst it may be suitable for you to apply the force majeure clause, you must also consider the long-term implications of this decision. 

It is advantageous to examine whether you are able to form a compromise, without completely severing ties. 

And finally…

With the outbreak of coronavirus, it is more important than ever to check your contracts and see how they cover such events. Consider whether applying force majeure, if possible, will benefit you in the long term, or whether it is possible to reach a contractual compromise. We wish you the best in your business endeavours.

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