Coronavirus might have consequences on existing contracts if qualified as a force majeure and in the light of local anti-contagion measures. A frequent request is to whether contracts can be either terminated or renegotiated or whether any lack of service or breach of service levels can be challenged due to coronavirus emergency.
I covered the topic in the video below in Italian as part of “Diritto al Digitale” and in this article.
Is coronavirus a force majeure event?
The scenario is different depending on local laws as well as of the anti-contagion measures enacted by the local governments. Indeed, for instance, the Italian Government obliged, among others,
- all retail shops to close, apart from food shops,
- all workers to smart work, unless there is a proven need to go to the workplace,
- all employers to implement very stringent anti-contagion health measures and
- all citizens to avoid leaving their homes, save for proven work-related or health-related reasons and to buy food.
Therefore a force majeure event could be represented by the coronavirus emergency itself, but also by the restrictions imposed as a consequence of its occurrence. Indeed, in the current circumstances, both events can be deemed unpredictable and out of the control of either of the parties.
What are the effects on contracts of a force majeure event like coronavirus?
As a first step, it is necessary to understand the impact of the force majeure event on the contract, and as to whether it makes the contractual performance
- either impossible;
- or excessively burdensome and therefore it can trigger the so-called contract frustration;
- or not beneficial for the business of the party.
Indeed, depending on the applicable scenario, the consequences are considerably different. Since in some countries, termination for force majeure can be exercised only if the contractual performance is impossible, while in others, the lack of interest of a party to receive the service due to the force majeure event or just the presence of an unexpected impediment can trigger per se the termination. In this respect, also the provisions of the United Nations on Contracts for the International Sale of Goods is relevant since it governs force majeure events, waiving liability of a party also when the event impacted one of its suppliers and as such prevented the provision of the final product/service.
Once the assessment of the impact of coronavirus on the contract is performed, the strong recommendation is to review all pending contracts. The management of a force majeure event and what can be qualified as such might be regulated therein. The contractual terms will prevail over civil law provisions.
Indeed, for instance, covid-19 emergency might be objectively considered a force event. Still, then if the business continuity clause of a contract is drafted in a way that all the risks due to business interruption are on a party, the termination or suspension of the contract cannot be invoked.
What rights has a party in case of a force majeure event?
Subject to what provided by the agreement, there might be right of termination of the contract, or in case of temporary impossibility, as the covid-19 emergency might be for rental agreements, there might be a suspension of the contract.
Also, civil law countries provide for the concept of good faith that could oblige the parties to re-negotiate the contractual terms in the current situation. And such a principle is also relevant to understand whether a lack of service or a contractual breach can be challenged in the present circumstances.
My top recommendations on how to handle commercial contracts
- run a due diligence on your main agreements to understand how force majeure events are regulated and what your options are;
- assess for each contract, the impact of covid-19 emergency and the anti-contagion measures adopted by local governments;
- determine whether the contractual performance is either impossible or burdersome or your company is no longer interested in the performance of the contract and consequently understand what options are available to you based on applicable laws; and
- contact your counterparty to find an amicable solution, bearing in mind that the outcome of the re-negotiation will considerably depend on your available legal options.
We discussed the topics above under the laws of Italy, the UK, the US, France, Germany, Poland, and China during a webinar whose recording is available HERE.