The Covid-19 pandemic is a global crisis. Beyond the terrible loss of life, most large economies are in some form of lockdown, creating unprecedented disruption to commercial activity.

Even if some sectors are bailed out, there will be numerous insolvencies and bankruptcies.

Much of the global trade system has also been thrown into chaos as export pipelines fracture and start to run dry. Few businesses can function normally; sometimes, they have ground to a halt.

The sustained impact of Covid-19 will be deep and drawn out over the coming decade as faltering global supply chains create a long-term problem for business.

The ideal configuration of a supply chain involves back-to-back contracts and pay-when-paid clauses. If problems arise, losses are allocated proportionately and appropriately across the supply chain, or to insured parties. But such co-ordinated structuring is rare.

Losses most often fall on the weakest link: a small business, or a consumer-facing business. It can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond its control.

What remedies does the law provide when performance becomes impracticable and is a party liable for breach of contract if they cannot comply?

If the terms provide no form of let-out, the only escape route (under English law) is through frustration: a contract becomes frustrated if something occurs where neither party is at fault after the date of the contract that makes further performance impossible or illegal, or is so fundamental that it strikes at the very root of the contract, and is beyond what any party originally contemplated before entering into it.

The unique nature of Covid-19 certainly meets the frustration criteria, but difficulties in performing, extra costs or delays would not be enough.

Short-term events do not usually frustrate long-term contracts. Permanent employment contracts will not be frustrated. Contracts will not be frustrated if they include force majeure clauses covering the circumstances.

Lawyers are now going through contracts looking for force majeure clauses. These excuse non-performance of contractual obligations because of extraordinary events.

Force majeure clauses normally allow parties to suspend performance for an agreed period, and/or to terminate without any liability on either side.

Even if Covid-19 amounts to force majeure, the effect of the clause is not automatic. It depends on the exact wording of the clause in each contract and individual circumstances: the situation has to be beyond the control of the affected party, and the direct cause of the interruption.

Where compliance with government advice is purely voluntary, that might not bring the situation within an force majeure clause. For example, the UK Government tried to achieve consent progressively to its requests rather than compelling people and businesses to comply.

Although the economic chaos created by Covid-19 pales into insignificance when compared to the thousands of lives lost, preserving the health of the economy also has a critical part to play in helping to keep future generations alive and well.

As the catastrophic damage caused by the virus continues to infect the economy, the mounting losses will spread unevenly: some will be much more adversely affected than others.

The sharing of those losses will not be fair, and we may see years of contract litigation as companies battle to preserve their balance sheets.

Much of the immediate price to be paid will fall on the shoulders of businesses that fail to make it through and on thousands of people who will lose their jobs.

Eventually, the burden of repaying some of the huge government debt incurred will be felt more widely by taxpayers as whole.

Chris Robinson is a specialist corporate lawyer at Excello Law

Further reading

Yardstick Agency releases Covid-19 client communication guide

 

This article was originally published on ProfessionalAdviser.com