COVID-19 and Potential Exposure to Costly Litigation
06 March 2020
The COVID-19 outbreak is and will continue to dominate the headlines and no doubt is the number one concern for suppliers and manufacturers in terms of their liability for failure to perform contracts. We examine what the risks are and steps that should be taken to deal with and mitigate these risks.
Force majeure clauses
With the outbreak of COVID-19 disrupting supply chains and cancelling travel plans, concerned manufacturers and suppliers should begin by reviewing the force majeure clause in their key contracts. The scope of application of this provision as drafted in the relevant contract will be essential in terms of determining whether force majeure has been triggered by any disruptions arising out of the COVID-19 outbreak. For more detail on the application of a force majeure clause see our companion article here
Dealing with consumers
Suppliers dealing with consumers need to be aware of additional risks. Consider the supply chain where a retailer’s suppliers are affected by COVID-19 and those suppliers can rely on the force majeure clause in their contract with the retailer. Because of robust consumer protections the retailer may not be able to avoid claims for redress from its consumers. In those cases, retailers need to ensure they have in place robust and detailed terms that will allow them to manage this downstream risk with their consumers. This emphasises the importance of paying particular attention to the details of all of your contracts in the supply chain and accounting for different legal obligations at each link in the chain.
Venue hire and sponsorship
Event owners should consider their venue hire, sponsorship and other hospitality arrangements for events that could still proceed, but in reality would be loss making because a sporting event or other large gathering has been cancelled. The question of whether fees due under those types of arrangements are repayable or whether the arrangements should automatically switch over to any re-arranged event will also need to be carefully considered.
Even if the force majeure clause is not triggered, there may be other defences available to any claims for breach of contract which arise.
No force majeure provisions?
If the contract does not contain a force majeure provision the parties may need to consider whether the contract has terminated by operation of law on any other basis, such as frustration.
A contract may be held to be frustrated when performance is impossible due to circumstances which are beyond the control of the parties. However, it should be noted that the doctrine of frustration is construed quite narrowly. If a contract only becomes more expensive or more difficult to perform, it is likely that this will be insufficient to trigger frustration.
In the event of there being no force majeure clause, and a claim for frustration is not an option, parties should also consider how to resolve the issue under any applicable dispute resolution provisions.
Other contractual provisions
Other examples of contractual provisions which might be useful for suppliers and manufacturers are termination provisions and any price variation mechanisms. Also of note is the jurisdiction clause. If the contract is not governed by Irish law you will need to seek local legal advice as the above may not apply to contracts not governed by Irish law.
Equally important, in the event of cancellation/delay/postponement, is whether the losses caused by the outbreak can be considered insured losses.
Most businesses would turn to their business interruption insurance (BI) policy, and may have high expectations about what will be covered. Traditional business interruption policies generally cover physical damage to property - a fire/flood type scenario and losses of this nature are easily quantified. A very prudent manufacturing business may have added extensions to cover an important supplier or customer but again these would generally be limited to physical damage at the supplier or customers premises or to goods during transit. With many Irish businesses relying on imports of goods or raw materials, particularly from China, what happens if exports from those countries are halted because of Covid-19? A traditional BI policy is not designed to respond to such a scenario. There are extensions available to cover infectious diseases but they are usually limited to direct losses caused by the occurrence of an outbreak on the insured’s premises. They also often include a specific schedule of diseases which are covered by the policy and this schedule may not include Covid-19.
A changing business world which no longer relies so heavily on a traditional manufacturing model, requires a more holistic and creative approach to insurance. Increasingly, businesses are looking beyond traditional BI policies and seeking insurance which covers non damage. Non damage policies cover events that can interrupt business and result in a loss, without any direct damage to assets. Such policies may respond to events like earthquakes, cyber attacks or global pandemics of infectious diseases. These types of policies are still relatively unusual however and are often a bespoke response to a business’s specific need.
What should you do
All businesses impacted by Covid-19 are likely to be affected and may be exposed to liability for breach of contract. In order to mitigate and manage your exposure to potential litigation act fast and intervene early:
Immediately review your key contracts and form a view on how the terms will or will not assist your predicament;
Reach out to your counterparty and engage on the issues and let them know if your view is:
They cannot rely on the shelter of the force majeure terms, or
You can rely on the terms of the contract to excuse your non-performance
Leave the argument/debate on the merits of your view for later, and
Take expert advice and document all of your dealings, especially involving any compromises
Finally, any contracts which are now to be executed should be clear on whether force majeure will be triggered in the context of an outbreak of a virus. This will provide some protection from potential costly litigation in the future.
This insight was contributed by Ciara Browne, Associate.
The content of this article is provided for information purposes only and does not constitute legal or other advice.