Many retail clients are asking for advice on the impact of the coronavirus crisis on their business and the rights and remedies available to them at law in this difficult situation. On 11 March 2020 the World Health Organisation (“WHO”) designated coronavirus a “pandemic”, i.e. a worldwide spread of a new disease. While such serious and widespread health public health emergencies are thankfully rare, they are not unique. Recent examples include “swine flu” (H1N1 virus) in 2009 and the yellow fever outbreak in Angola in 2016.

Do I need to permit employees who are concerned about catching the virus to work from home?

In a retail context, this is not a realistic proposition unless the employee is sick or falls into a high-risk group. Employers have a duty of care towards their employees and need to weigh their business interest with the well-being of staff. Many companies have taken a dual approach allowing employees with pre-existing conditions to work from home whilst asking healthy staff members to continue with their normal duties. For more information on your rights and obligations as an employer, please click here.

Can I terminate the lease or reduce rent because my revenues have collapsed? 

Some leases may contain force majeure clauses that enable parties to suspend performance or terminate. A typical force majeure clause would recognise an epidemic or pandemic. It may also recognise acts by government authorities such as placing an entire city or country under quarantine and other events of a similar nature that are beyond the control of the parties as force majeure.

If the agreement recognises the current coronavirus crisis as an event of force majeure, you will need to examine the rights and remedies applicable. Normally, only performance that has become impossible is suspended, and paying rent may not be in that category. Neither would the obligation of the landlord to make the premises available for use and occupation normally be suspended unless the building is under quarantine. Absent force majeure, some countries may recognise a doctrine of frustration of contract but this would only apply in extreme cases. After the Second World War, there were cases of buildings becoming unfit for occupation or confiscated by the armed forces but it is difficult to see how those would apply in the current climate, unless a government was confiscating the property to create quarantine centres or emergency hospitals. Another potential scenario might be where the building itself is considered to be contaminated. 

For more details on the impact of the current pandemic on leases please click here and here.¹

What are the considerations around supply agreements and cancellation of orders?

As stated above, a typical force majeure clause may also recognise acts by government authorities such as placing an entire city or country under quarantine as force majeure. Further, many force majeure clauses contain additional general wording about other events ”beyond the reasonable control of the parties” being recognised as force majeure, and the current pandemic may arguably be said to come under that. Courts will interpret force majeure clauses narrowly so that only the events expressly listed and those similar to the events listed are covered. If the agreement recognises the current coronavirus crisis as an event of force majeure, you will need to examine the rights and remedies applicable. Normally, only performance that has become impossible is suspended and paying money may not be in that category. If you are the customer receiving the delivery and making payment, performance is therefore unlikely to be impossible. If you are the supplier and you are unable to manufacture or deliver the goods because of staff shortages, quarantine or travel restrictions, you may be able to rely on this clause. However, as stated, it is important that the inability to perform is caused by the pandemic. In the English case of Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102 a party was unable to rely on a flooded mine caused by a burst dam as an event of force majeure excusing failure to deliver iron ores, despite such an event being expressly included in the relevant clause, as the courts found that the ores could not have delivered in any event due to unrelated issues. 

Some contracts may also allow suspension if performance has become “commercially inadvisable” or impracticable. This may give more of an opening to a party that could perform (e.g. the paying party). The advice will depend on the exact wording in each case bearing in mind that courts will interpret the provision narrowly.

In the event that the force majeure clause is applicable, you need to consider what rights and remedies it gives you. These may include suspension of obligations, extensions of time for compliance or even termination. Termination is usually an option of last resort and applies after the event of force majeure has been occurring for a certain period of time, normally between 6 and 12 months. The current crisis has only been in place for two or three months, so you may have to wait. You may be able to suspend performance in the interim but only if it has been become impossible as a result of the crisis. The exact wording of the contract will be crucial and must be examined carefully by your lawyers. Suspension or delay may often be more appropriate than termination as the current crisis is expected to last until the summer and after the summer it may well be possible for normal business proceedings to be resumed. 

Occasionally, contracts do not contain force majeure provision. In such cases, the parties need to rely on the narrower common law or civil law doctrines of frustration, impossibility or impracticability. These may help if it can be argued that it is impossible to perform the contract. Under some legal systems an act may be deemed impossible if it cannot be done at all or only at excessive costs. The doctrine of impossibility requires something unexpected (the pandemic) to have occurred that has made performance impossible and the agreement must not already contain a clause expressly allocating the risk to one of the parties. However, many courts in the world apply the doctrine narrowly only to cases where the unforeseen event has destroyed either the subject matter of the contract (the ship has sunk) or the means of performance (the venue for a performance has burned down). So a pandemic that makes performance difficult but not impossible may not be recognised as a case of impossibility. The exact analysis will depend on the specific facts and governing law in each case. 

Where the force majeure provisions do not assist and the doctrine of impossibility does not apply, it is possible to consider ordinary termination rights. Some contracts can be terminated on reasonable notice. This will apply if the contract expressly says so or where the contract does not have an end date. Many civil law legal systems will specify the termination period – typically between one month and six months depending on the length of the underlying relationship. If the situation is desperate, you may also wish to examine termination for breach. The breach may be independent of the current coronavirus situation but there is nothing to prevent the innocent party from terminating for breach where a breach has arisen. Possible breaches can include unexplained delays in delivery, delivery of defective products, delivery of the wrong quantity of products or failure to comply with other obligations that have been agreed between the parties. Of course, if the other party’s breach has been caused by the pandemic, it may not be possible to terminate if the issue has been caused by a force majeure event.

We recommend that all businesses review their key relationships and contracts with both suppliers and customers and consider where the pandemic and Government responses are likely to cause issues for both themselves and the counterparties. If you are unable to perform, it is important that you consider whether you have the protection of force majeure. Equally, if you believe that a counterparty may not be able to perform, it is important you consider whether their actions are protected. 

If you are currently negotiating a new agreement you should review carefully any proposed force majeure clause to consider if risks to your business from the current pandemic are appropriately covered. A carefully negotiated force majeure clause is an important business tool. It is also important to bear in mind that a contract cannot be frustrated by events which were foreseeable or already in motion when the agreement was entered into. For example, in the case of Flying Music Company Ltd v Theater Entertainment SA and others [2017] EWHC 3192 (QB) the English courts rejected the argument of the defendant, a theatrical promoter based in Greece, that its contract to lay on performances in Athens in 2010 was frustrated by reason of civil unrest. The court took the view that there was already a degree of unrest when the contract was signed and, while the parties could not know how long that unrest would go on for or how serious it would be, the contract should not be discharged. In view of the current knowledge of the severity of the Coronavirus pandemic, it is unlikely that contracts entered into now could be frustrated by the outbreak, unless the situation materially worsens. 

For more information on the impact of force majeure clauses on your legal rights and remedies under contractual agreements please contact a member of the Dentons global retail group.

• Babette Marzheuser-Wood
• François Chateau

1. Through a UK lens. Please contact us on covid19Response@dentons.com if you have questions. ↩