Matthew Howse, Partner, Dispute Resolution & Litigation, Eversheds Sutherland, Belfast
Coronavirus has dominated the news agenda for the last few weeks, which is understandable in circumstances where the World Health Organization has declared a Public Health Emergency and the death total now sadly exceeds 1,000.
Quite rightly, the focus has been on the global health implications. An aspect of this crisis that has been overlooked, however, has been the potential impact of interruptions to business contracts. Businesses can’t afford to overlook this any longer and with ever-increasing interconnectivity, neither can businesses in Northern Ireland.
This week, Nissan in Japan temporarily halted production because of difficulties in obtaining parts from China, while Hyundai temporarily closed factories in South Korea. China is the world’s manufacturing powerhouse and a major part of the global supply chain. This is undoubtedly going to have an impact on businesses in Northern Ireland due to the reliance on Chinese parts and manufacturing here.
The experience of the SARS outbreak shows that the impact may only worsen. Businesses should now take the time to carefully examine contractual rights and obligations. The best starting point is to work out whether provisions that relieve a party from its obligations to perform its contract in certain circumstances are included within its contracts.
‘Force majeure’ clauses are often turned to in testing circumstances, however with no recognised meaning in Northern Irish (or English) law, whether or not Coronavirus and the resulting implications of government restrictions are covered will be determined by the wording of the specific contract.
To benefit from a force majeure clause, businesses will need to check what exactly is covered. A clause which refers to performance of a specific contractual obligation being prevented presents a greater hurdle to get over than a clause which merely refers to performance being impeded or delayed.
Another key consideration is to check how the clause interacts with business continuity provisions and if the impact of the situation could have been mitigated in any way. Meanwhile, the notification requirements in the contract must also be checked. Notice of the occurrence of a force majeure event must be provided in accordance with the contractual notice requirements to have any effect.
Simply put, words matter. If the necessary wording is included in the contract, affected businesses may be entitled to suspend their obligations and avoid liability for any possible failures. Accordingly, this may also lead to the termination of the contract by either party. It is worth noting that it is the party claiming relief under the force majeure clause who has the burden of proving that the event has occurred and that it prevents or hinders their performance.
And what if the words aren’t there? What if the force majeure clause doesn’t exist? In these circumstances, the doctrine of ‘frustration’ may help. This applies when something happens (after the contract has been formed) which is not the fault of either party and which makes it impossible for a party to fulfil a key obligation of the contract, or which essentially completely alters a key obligation under the contract to such an extent that the nature of that obligation has completely changed. In this instance, the contract will automatically be discharged, however the standard for this is much higher than a normal force majeure clause.
There is a lot to consider. The complexities associated with these cannot be overstated or overlooked. It’s up to businesses who are part of a supply chain and may be or become impacted by Coronavirus to carefully consider whether they or the other part, can rely on a force majeure clause. Ultimately, the words written into the contract will be crucial.