17th April 2020
Walker Morris’ Commercial and Dispute Resolution specialists James Crayton and Gwendoline Davies offer essential legal and practical advice for businesses concerned about Coronavirus and contractual obligations.
By the end of February 2020, new cases of Coronavirus/COVID-19 reported outside China exceeded new cases in China. Despite international efforts to contain the virus, the World Health Organisation formally declared the outbreak to be a public health emergency of international concern and the number of international confirmed cases continue to soar daily. In Europe, many countries have been placed on lockdown (with some taking more draconian measures than others) and vulnerable people have been advised to stay at home. For some, the lockdown is set to continue for at least a number of weeks, whereas countries such as Italy which is a few weeks ahead of the UK, have now started to relax the measures, with some shops such as children’s clothing shops being allowed to reopen. In the UK, sporting and social events have been postponed and cancelled; schools and many offices have closed, and strict guidelines are in place encouraging people to stay at home unless travel is essential and/or work cannot be performed from home. Quite apart from those suffering with or succumbed to the illness, there is no doubt that the human impact of this virus is significant, and is being felt increasingly close to home. But what about the impact on businesses?
It is estimated that some 60 million people in China have faced travel restrictions and around 55 companies in Shanghai alone reported in mid-February that their global operations had been affected – largely by a shortage of manufacturing workers . With businesses around the world being heavily reliant on trade with China, and with existing supply chain inventory now becoming depleted or exhausted, economies and businesses across the world are starting to experience the knock-on effects.
The Port of Los Angeles, the busiest port in the US, expects to report a 25% drop in business for February 2020  and the US Central Bank slashed interest rates in the face of mounting concerns about the economic impact of the virus. In the UK, JCB halted its production line and cut staff working hours because a shortage of components from China has meant that production forecasts cannot be fulfilled. Fiat Chrysler has warned that some of its European plants could be forced to cease production and Nissan has closed a factory in Japan. These are just a few recent examples of the countless reported incidences in which the Coronavirus is impacting international trade.
Apart from the impact on individual businesses, there are a number of factors which, together, mean that the worldwide economic impact of Coronavirus is likely to be more severe than has been the case with other, past epidemics: increased globalisation over recent years; the growth of China’s economy to more than 16% of global GDP; China’s output amounting to around a quarter of the world’s manufacturing; China’s dominance in certain industries (including high technology, electronics and robotics, automotive components and production, pharmaceuticals, and second tier supplies such as batteries and other underlying components); downward pressure on costs; increased outsourcing; and so on.
Over the coming weeks, therefore, businesses are likely to become increasingly concerned about the impact of the Coronavirus on their supply chain arrangements and commercial viability, and many businesses are likely to be feeling the effect already.
Whether or not contracts or common law remedies allow parties flexibility within, or the ability to terminate, arrangements which are affected by the virus, and by the resultant economic climate, will be key.
The English common law doctrine of frustration provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated.
A frustrating event is one which: occurs after the contract has been formed; is so fundamental as to go to the root of the contract; is neither party’s fault; and renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.
Importantly, however, the doctrine operates within very narrow confines and the courts will not lightly relieve parties of their contractual obligations.
In particular, frustration is not available where a contract has otherwise made express provision for the consequences of the occurrence of the event in question; where an alternative means of performing the contract is possible; or if the contract merely becomes more expensive or less commercially viable to perform. The bar for a successful frustration claim is high.
In addition, because no one party is at fault in an incidence of frustration, neither party may claim damages, and if a party incurred obligations before the time of frustration, it remains bound to perform them .
It is possible, however, in light of the scale of the outbreak and the unique underlying economic context, that the impact of the Coronavirus could, depending on the facts of individual cases, found successful frustration claims.
Where frustration does not apply or cannot be established, an express force majeure clause may otherwise excuse one or more parties from performance of a contract following the occurrence of certain events which are outside a party’s control. There are some important points to note:
Where, as a result of the impact of the Coronavirus, a business wishes to extricate itself from, or avoid potential breach of, or re-negotiate the terms of, a contractual arrangement, frustration or force majeure might well assist. Neither of these are necessarily easy options, however, and specialist legal advice will be required.
The following practical tips represent good practice generally, when it comes to anticipating, attempting to cater for, and reacting to an uncertain and ever-changing commercial marketplace.
In terms of existing arrangements:
In terms of new arrangements:
Relying on a purported force majeure or similar clause, or attempting a frustration claim, is not an easy, nor by any means a guaranteed, ‘get out’ for contracting parties when times get tough. By far the better advice is to try to anticipate, at the point of drafting, the types of circumstances in which the parties may require flexibility to renegotiate key terms; may wish to extricate themselves entirely from the arrangements; and/or may wish to avoid or limit liability for any breach or non-performance, and then to cater for those eventualities in the contract.
Other commercial issues which the Coronavirus has highlighted to businesses are the risks of becoming overly dependent on any one source or country of origin for vital supplies, and the delicate balance which should be struck between cost and the supply chain resilience that comes from shoring-up with increased inventory. Undertaking an end-to-end review of the supply network will help businesses to determine the right level of redundancy to build into their chain, so as to offer maximum flexibility and facilitate business continuity in the face of Coronavirus or any other unexpected and significant event. Contracts which tie parties into exclusivity need to be carefully considered in this context.
If you would like any further advice or assistance in relation to any of the issues raised in this briefing, please do not hesitate to contact James or Gwendoline, who will be very happy to help.
 The Manufacturer, 25 February 2020
 Financial Times, 2 March 2020
 the Law Reform (Frustrated Contracts) Act 1943 does, however, provide some limited scope for parties to recover monies paid under the contract prior to the frustration
 Classic Maritime Inc v Limbungan Makmur  EWCA Civ 1102
 See our earlier briefing for further information on variation/anti-variation provisions
 See our earlier briefing for further information on limitation/exclusion clauses
 See our earlier briefing for further information on dispute resolution clauses