COVID-19 and VIRUS CLAUSES

Stephen Cotton

Published by
Stephen Cotton

31st March 2020

Wright, Johnston & Mackenzie LLP expects that we will soon see an increased appetite for inserting ‘virus clauses’ into future contracts as a result of the current COVID-19 crisis.

We are now hearing a lot of talk of ‘virus clauses’, and how these should be factored into contracts from now on. This is a very valid point and we’re at the ready to advise on this area.

While concern about future contracts is a legitimate worry, companies should first and foremost focus their energy on their current contracts.

When inspecting a current contract, you have to consider if you want to enforce it, or if you would rather escape from or postpone your obligations. The law expects performance, but it also recognises there are some circumstances in which this simply isn’t possible.

We’d advise against purely concentrating on adding the suddenly fashionable force majeure provision – a common clause in contracts which essentially frees both parties from their immediate liability – into contracts from now on. Your priority should be a detailed review of the already binding contracts you are concerned about. That is certainly where a court will start.

Even if there is a force majeure clause, it can prove problematic given it records what the parties had in mind when they contracted, and courts will be slow to go beyond it. Indeed, there are conflicting cases saying, on the one hand, simply mentioning force majeure or even circumstances beyond the control of the parties may let in the Court’s discretion to grant relief but, on the other, if the clause goes on to list certain illustrative examples of force majeure, the relief might be limited to only circumstances analogous to the examples. In any event, the court will need to be convinced that the force majeure occurrence is the only cause of your failure to perform.

Without any force majeure clause, none is implied in UK law but a common law principle called frustration of contract could free you from your obligations. However, there is a very high bar to cross. Briefly, if your performance is radically different, in effect meaning impossible, from that which the parties envisaged when they contracted, you or the other party may be released from the obligation. Conversely, if you have a force majeure provision which does not cover the circumstances, the court will be much harder to convince that frustration should apply as your ‘back-up’.

Although rare, it is worth adding, at least in brief, that our courts have also been prepared on occasion to look at so-called ‘piecemeal solutions’ to tackle unfairness and enforce fair dealing, especially in so-called long term relational contracts. When the crisis is finally over, we can expect all sorts of legal arguments. For example, going back to the listed circumstances if you have a force majeure clause, what does an Act of God cover if that is all you can cling to in the force majeure clause you are currently stuck with?

While there are certainly lessons to be learned from the situation we currently find ourselves in, barring a new agreement with the other party to address or vary the current contract, adding a virus clause can only typically affect the future, not your existing position. The legal fall-out from this crisis will be largely about your existing contracts.

Please remember that we at Wright, Johnston & Mackenzie LLP are here to help, so please don't hesitate to get in touch if there is anything you think we can help with.

For any advice in relation to any particular aspects of the above, please contact Stephen Cotton, Partner and specialist in contract law on smc@wjm.co.uk

The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at March 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.