The worldwide spread of COVID-19 has the potential to bring devastating consequences for individuals and communities across all regions. In addition to the very real human impact, the ongoing spread of the virus presents huge challenges for businesses that rely on complex global supply chains.
There are a number of possible consequences and remedies for those in supply chains affected by COVID-19, giving rise to a number of options for businesses in terms of approach. Ensuring that the correct decisions are made at the outset will greatly assist businesses in mitigating the commercial impact on the supply chain and avoiding disputes in future regarding the steps taken:
- A party whose ability to perform its obligations is affected by COVID-19 may be able to:
- Rely on a “force majeure” clause;
- Rely on the doctrine of “frustration”;
- Rely on other clauses in the contract, such as “MAC” (“material adverse change”) and emergency change control provisions.
- Parties should check the position on material contracts and identify any notification provisions or other obligations that apply, as part of their overall strategy to mitigate the impact of COVID-19.
- There may be a tension between identifying steps to protect employees and the impact of those steps on key contracts.
- When dealing with contractual counterparties in relation to steps taken to mitigate the impact of COVID-19, Parties should consider carefully whether they are seeking to agree substituted performance in full and final settlement of any subsequent claims or simply seeking to mitigate the impact without prejudice to any claims they may have against one another in future and ensure that this is properly recorded.
- Force Majeure clauses generally allow a party affected by an event beyond the control of that party to suspend performance of its obligations without penalty;
- However, the wording of these clauses is critical and their impact is a question of contractual construction. The following considerations are likely to arise:
- Does COVID-19 represent an event that triggers the relevant clause?
- What is the impact of the party’s own actions in contributing to its ability to perform? For instance, if it has imposed a travel ban that has meant it is unable to perform, that may limit its ability to rely on the clause;
- Whether performance must be “prevented” (essentially impossible) or whether it is sufficient for it to be “delayed” or “hindered” for the clause to bite; and/or
- The consequences of triggering the clause, in terms of what steps the affected party must take, and whether prolonged inability to perform will lead to a termination right (for either party).
- The commercial consequences of any legal steps taken, including in terms of the impact on the stability of the supply chain overall
- Particular challenges may be faced by parties in the middle of supply chains, on the one hand requiring suppliers to perform, while on the other hand needing to argue to customers that performance is impossible or should be delayed.
- The doctrine of “frustration” allows a party to treat itself as discharged from its obligations and the contract as at an end if it is impossible (not merely more difficult or uneconomic) to perform its obligations or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
- The application of the doctrine of frustration is highly fact specific and it seems unlikely that it will apply other than in quite limited circumstances. Parties should therefore exercise caution in seeking to rely on it.
- There may be other contractual provisions on which a party can rely to escape consequences from a failure to perform, such as a “MAC” clause (commonly in finance or acquisition related documents), or emergency change control provisions (often in, for instance, outsourcing and IT project contracts).
- Whether these clauses will apply, and the consequences of them, will differ between contracts. The onus will be on the party seeking to rely on the relevant clause to demonstrate that it has met any trigger requirements.