Coronavirus and Contract Withdrawals

May 22, 2020 | Siraj Khan

coronavirus contract withdrawalsUsually contracts provide people with a sense of security. Each party knows that no matter what happens the other party is obliged to fulfill their agreed contractual obligations. What happens though when a pandemic hits?

The Covid-19 pandemic has changed the way we live, work and do business. In the past weeks we have seen companies like Primark and Tui trying to determine whether they can use the “force majeure” clause that is incorporated in their contracts to escape their agreed contractual obligations.

What is “force majeure”?

A force majeure clause is a clause that can release or suspend one or all the parties from their agreed contractual obligations when an extraordinary event or circumstance beyond their control occurs. For example, war, riot, or an act of God such as a hurricane, flood, earthquake or a pandemic.

Is such a clause applicable?

The “force majeure” clause is applicable if the extraordinary event or circumstance falls within its scope. For example, if the clause specifically sets a pandemic or lockdown as an extraordinary event or circumstance, one or all the parties will be in a strong position to claim that Covid-19 falls within its scope. Conversely, if the clause refers to “events beyond either party’s reasonable control”, the onus is on the party trying to rely on the clause to prove that the extraordinary event or circumstance falls within its scope.

The measure of disruption specified in the clause must also be met. For example, the clause may justify either party of delay as a result of the extraordinary event or circumstance or the clause may state that the extraordinary event or circumstance renders the agreed contractual obligations of either party impossible or illegal. However, even if Covid-19 is within the scope of the clause, if it does not render the performance of the agreed contractual obligations impossible or illegal, one or all the parties may not be able to rely on it.

What to do now?

Parties should check their contracts and begin to prepare risk mitigation measures. Among other things, they should check if a force majeure clause exists and whether or not Covid-19 and any associated governmental action falls within its scope. Moreover, they should check whether their insurance policy covers them for any potential losses.

What to do in the future?

Parties should include a “force majeure” clause in their contracts, review it every year depending on their risk assessments and they should always have ways to mitigate any potential losses no matter how unlikely they may seem.

The content of this article is for general information only. The information in this article is not legal or professional advice.

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