Coronavirus is disrupting supply chains all over the world. If the impact of the virus is making you consider whether to cancel contracts with suppliers or customers, there are some legal risks to think about before you go ahead.
Force majeure – cancelling contracts with suppliers
Most English law contracts will often define what constitutes a force majeure event by reference to events “beyond a party’s reasonable control”. This is usually by way of a non-exhaustive list of the type of events covered. Even if there is no express reference to “outbreaks of disease” or “epidemics” in the list of force majeure events, the coronavirus may still be regarded as a force majeure event. Therefore, caution must be exercised in relation to bringing the following actions against your supplier:
1. Cancelling a contract – Many force majeure clauses merely provide for obligations to be suspended for the duration of the force majeure event. They rarely give rise to an immediate right to terminate, so make sure you check the detail of the clause before you act.
2. Claiming damages – If your supplier fails to deliver goods or deliver on services because of disruption caused by the coronavirus, a claim may not be as straightforward as first imagined. Some suppliers may be protected by the wording of a force majeure clause, which would relieve them from liability where the delay or failure to perform is “beyond their reasonable control”.
Cancelling or postponing contracts with customers
Firstly, check if your customer contracts contain a force majeure clause. If they don’t, it’s not the end of the line, as they may include other terms which give you a general right to cancel the supply of goods, cancel services cancel or reschedule an event.
Take the following actions now:
1. Review all customer contracts in which force majeure may be a factor – whether used by or against you
2. If you are able to invoke a force majeure clause, consider the time limits and notice for doing so
3. Consider if there are any alternative ways of performing contractual obligations to your customers and take appropriate mitigation steps
4. Retain all evidence of disruption, including documents proving delay or cancellation
5. If entering into new contracts, draft clauses sufficiently clearly to cover eventualities such as the coronavirus outbreak
6. Consider whether you are covered by insurance – find out if you need to notify your insurers and if business interruption insurance applies.