By Emily Gakiza and Timothy J. Mutungi
COVID-19’s potential economic danger is much stronger than its health risk to the public. China is the world’s largest exporter and is responsible for a third of global manufacturing, so China’s problem is everyone’s problem.
Is COVID-19 a force majeure event?
Companies may be considering whether the COVID-19 outbreak constitutes a force majeure event such that a party is excused from its contractual obligations. Most standard commercial contracts usually include force majeure clauses that cater for events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics. Where the term epidemic, or pandemic, has been used, that will clearly cover Covid-19.
Frustration
The English Common Law doctrine of frustration provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated. A frustrating event is one which: occurs after the contract has been formed; is so fundamental as to go to the root of the contract; is neither party’s fault; and renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made. In light of the scale of the COVID 19 outbreak and the unique underlying economic context, the impact of the Coronavirus could, depending on the facts of individual cases, found successful frustration claims.
Companies Rise or Fall on How Well They Renew Their LeadersWhat practical advice can be offered in the circumstances?
Where, as a result of the impact of the Coronavirus, a business wishes to extricate itself from, or avoid a potential breach of, or re-negotiate the terms of, a contractual arrangement, frustration or force majeure might well assist Neither of these are necessarily easy options, however, and specialist legal advice will be required. Parties concerned about the potential effects of the Coronavirus on any aspect of their business or supply chain should undertake an urgent contract review.
Where the supply chain or other contractual issues do arise, parties should consider commercial and reputational risks, alongside legal issues. Parties should also consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage.
Emily Gakiza and Timothy J. Mutungi are Partner and Senior Associate respectively in the banking and finance practice at Ortus Advocates.
