The coronavirus (Covid-19) pandemic has impacted the ability of businesses throughout the UK to maintain operations and fulfil existing contractual obligations. The Government imposed unprecedented restrictions on travel, movement meaning companies and local businesses from all sectors have experienced severe business interruption.
There is a possibility of a rise in claims and commercial disputes for coverage of losses resulting from incomplete contracts, which could also lead to ongoing business interruption for you.
Many legal contracts are written to include force majeure clauses, which excuse a party’s non-performance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations.
In general, when applying a standard force majeure clause, I understand that companies, their solicitors and courts look at whether: (1) the event qualifies as force majeure under the contract’s list of terms; (2) the risk of non-performance was foreseeable and could have been mitigated; and (3) performance is truly impossible.
The classification of Covid-19’s as a pandemic by the World Health Organisation will trigger a force majeure clause that expressly accounts for “pandemics.”
However, whether the wording is vague or all-encompassing, the parties will have to prove that Covid-19 was the specific reason for one party not to perform their side of the contract. There must be a genuine failure or likely failure to perform and it must be established that Covid-19 caused the failure to perform. The simple fact of Covid-19 existing will not be enough to be able to rely upon the force majeure provision, if the impact of the outbreak did not actually cause the party’s failure to perform the obligations.
If consensus is not reached by the parties, it will be up to the courts to determine whether the application of force majeure clauses is valid in each individual circumstance, depending on the nature of the contract and what type of services were to be provided.
Whilst we would all hope that the general consensus in these unprecedented times would be that contractual behaviour and the enforcement of deadlines be reasonable and proportionate, you may find yourself having to raise a claim or be on the wrong end of unreasonable behaviour and party to having to defend such a claim.
As lockdown is progressively eased, it may be that everything is amicable for now. We are seeing that some industries are returning to some form of new normality sooner than others. However, some businesses in that sector may be slower to return than others due to not being able to put in place the appropriate health and safety regulations.
So, what happens during this phased return – are people going to have the same level of understanding or will they start to enforce the timescales for fulfilment of contracts with a different perspective? Many businesses want to get back to earning profits again as soon as possible, so may not be as amiable to a delay you insist is outside of your control.
It is very apparent that the ongoing business interruptions, as a result of Covid-19, will have knock-on effects for many more months to come. This may lead to future breaches of contract. For you, this delay or breach of contract may lead to a delay in the launch of a new product or the opening of a new building, which impacts on your ability to trade at the same levels as you had anticipated.
The process of putting together the claim generally starts with proving the loss and how best to quantify it. The principle of calculating the lost income may be straightforward, but the calculations can be more complex, and any claim will have to be substantiated with facts based on the timeline of events and historical trading results.
When putting together a report quantifying a loss from the breach of contract, we recommend that you consider the following:
If you are defending a claim, you will seek to verify all of the above and challenge the assumptions used by the pursuer.
Ultimately, you want to be able to ensure the story, the numbers and the corroborative evidence are all in agreement.
Armstrong Watson has experts who have assisted business owners and insurers with, preparing, reviewing and defending claims for breach of contract and business interruption. If you require any assistance, please contact a member of our team.