‘Virus clauses’ to become contractual norm

'Virus clauses' to become contractual norm

Stephen Cotton

A solicitor who specialises in contract law expects we will soon see an increased appetite for inserting ‘virus clauses’ into future contracts as a result of the current COVID-19 crisis.

Stephen Cotton, partner at Wright, Johnston & Mackenzie LLP, said: “Hindsight is a wonderful thing. Even if our school history lessons failed to cover the Spanish Flu pandemic of 1918, most of us will recall the Swine Flu outbreak of 2009.

“In spite of this, it’s remarkable how few ‘day-to-day’ contracts make any provision for this sort of occurrence, and even if they do, they fall at the second hurdle - namely what should happen in contract terms should a pandemic occur.

“In light of COVID-19 and its ongoing impact on industries across the globe, we are now hearing a lot of talk of ‘virus clauses’, and how these should be factored into contracts from now on.”

However, the contract lawyer also stressed that, while concern about future contracts was a legitimate worry, companies should first and foremost focus their energy on their current contracts.

He added: “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.

“I’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’.”

He added: “Although rare, 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, I’m afraid that, 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, I’m afraid, be largely about your existing contracts. Horses having bolted comes to mind.”

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