At the start of this year it was a completely unknown virus.
But the sudden and unexpected emergence of Covid-19 and the ensuing pandemic have since come to dominate every feature of business and personal life. In a matter of weeks, this has created unprecedented public health and economic challenges right across the world.
In their response, a strategic battle is being fought by national governments and health authorities on every front to mitigate the risks and minimise its impact.
The new normal, although the current situation is anything but normal, means that few businesses can function properly, and in some circumstances they cannot function at allBeyond the enormous loss of life, which rises inexorably each day, many countries are also having to endure an unprecedented level of disruption to working life and commercial activity in every area.
At the same time, multiple borders have been closed and much of the world has been put in varying degrees of lockdown.
Key Points
- Covid-19 has created public health and economic challenges
- The loss will most likely fall on a supply chain’s weakest link
- Many contracts contain force majeure clauses, which allow the parties to suspend performance
Even if governments eventually choose to bail out some sectors in their national strategic interest, a significant number of insolvencies, bankruptcies and redundancies are inevitable right across the spectrum.
Predicting where the axe will ultimately fall is invidious, but equally necessary for lenders and governments alike.
Whatever strategies and contingency plans were already in place, they usually anticipated geographically specific events like a hurricane, potentially allowing companies to shift operations without much effort to offices in other locations.
But no business was fully prepared for the scope and scale of this eventuality.
The new normal, although the current situation is anything but normal, means that few businesses can function properly, and in some circumstances they cannot function at all.
As the current centre of the pandemic, Europe faces the additional problem of faltering global supply chains. Most likely, this will become protracted as the Covid-19 crisis only serves to highlight their pre-existing fragility: the severing of one link can cause extensive disruption throughout the rest of the chain.
Even in ordinary circumstances, supply chains and labour markets are complex and loosely structured. But these times are far from being ordinary.
The multiple effects of losses created by Covid-19 will be far reaching, enduring and on a scale never previously envisaged. Easily eclipsing the economic impact of the global financial crisis, you have to look back 90 years to the events of 1929-32 for a peacetime equivalent.
The weakest link
The ideal supply chain should be configured with back-to-back contracts and pay-when-paid clauses. In the event of any significant problems arising, the consequential losses are then allocated proportionately and appropriately right across the supply chain, or to the parties who are insured.
But very few supply chains are ideal and such a configuration is the exception rather than the rule. In reality, the loss will most often fall on the chain’s weakest link. Often, that will be a small business that has been unable to negotiate let-outs with its customers or suppliers. You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.
Consumer-facing businesses are particularly vulnerable, because consumer rights to cancel or get refunds will not be matched in contracts with their suppliers.
That the weakest link should suffer such unfortunate consequences provokes many questions. In particular, what remedies are provided by English law when performance – the act of doing that which is required by a contract – becomes impracticable? Is a party liable for breach of contract if he/she is unable to comply?
In law, if the contract terms do not provide for any form of let-out, then (under English law) the only legitimate escape route is via the legal concept of frustration.
Put simply, a contract becomes frustrated if something occurs after the date of the contract that is not deemed to be the fault of either party, that makes further performance impossible or illegal, or is so fundamental to the contract that it strikes at its very root and beyond what was originally contemplated by any of the parties before they entered into it.
Frustration ends the contract entirely, with basic rights for advance payments to be refunded and parties to be reimbursed for expenses incurred.
The extraordinary circumstances that have arisen from Covid-19 are more than capable of amounting to frustration, but difficulties in performing, extra costs or delays would not be enough. Long-term contracts, or employment contracts, are unlikely to be frustrated.
Force majeure
Thanks to Covid-19, force majeure clauses, which usually remain dormant in most contracts, have now taken centre stage. They excuse non-performance when extraordinary events prevent a party from fulfilling its contractual obligations.
Many contracts contain force majeure clauses, which allow the parties to suspend performance for an agreed period of time and/or to terminate the contract without any liability being incurred on either side.
Whether a public health emergency like Covid-19 amounts to force majeure is not automatic, however, even if the response to the virus has restricted the ability of many businesses to manufacture, distribute or sell their products. It will depend instead on the precise wording and scope of the clause in each contract: the situation must be beyond the control of the affected party.
Notably, the presence of a force majeure clause can mean the contract is not frustrated: if the agreed terms deal with a situation, that situation will not of itself frustrate the contract.
Force majeure clauses often require formalities, such a giving notice to the other party.
Although the economic mayhem created by Covid-19 is insignificant compared with the level of human suffering it continues to cause, the future health of the British economy also has a very important part to play in helping keep people alive and well.
As the unavoidable damage caused by virus containment measures continues to spread throughout the economy, the eventual losses will be unevenly spread: some will be adversely affected a great deal more than others.
Despite the enormous scale of financial support measures already announced by the UK government, there is not a bottomless pit of money in the long term.
Instead, much of the price to be paid will fall on the shoulders of businesses that fail, their creditors and regrettably, on the many thousands of people losing their jobs.
The eventual cost will be born more widely: by employees, business owners, shareholders and pension fund members, but not in an equitable way.
Chris Robinson is a specialist corporate lawyer at Excello Law
