“What does COVID19 mean for terminating contracts – and insurance. We asked Francis Hornyold-Strictland, Barrister at the 36 Group and Akbar Ali, Corporate Partner at Berkeley Rowe for their thoughts”.
The Covid-19/Coronavirus pandemic is striking deep at the heart of businesses globally, as well as the individuals working for those businesses. This is also having a huge effect on supply chains (whether physical or for the supply of services). Consequently, many companies will want advice on: (a) whether they are in breach of contract if they fail to meet their contractual commitments to counterparties as a consequence of Coronavirus; and (b) whether their insurance policies provide adequate cover for loss of revenues they are suffering. Under English law, the answer to those questions will depend, in many cases, on the specific wording of the contracts in place.
Breach of Contract and Covid-19
Whether parties are in breach of contract if they fail to meet their contractual commitments as a consequence of Covid-19, is likely to turn on: (a) whether the parties have an express force majeure clause in their contract, which excuses either party from non-performance as a consequence of a force majeure event; and/or (b) whether the party’s contract has been frustrated, which would result in the contract being automatically discharged and losses between parties lying where they fall.
As to the usefulness of a force majeure clause in the event of a pandemic, that will depend heavily on the wording of the clause in question: specifically, if certain types of event that would qualify as force majeure are listed in the clause as examples, these are often construed as a “closed” group – so only similar types of event qualify as force majeure (i.e. applying the principle of ejusdem generis). For example, if the clause lists “floods, storms, hurricanes, and mud slides” as examples, you are likely to be covered only for natural disasters. Accordingly, does your force majeure clause include reference to a pandemic or global contagious disease, or similar? If so, you may be in luck.
By contrast, it may be that a party has a strong argument that a contract has been frustrated. For instance, if it becomes impossible to supply widgets to a counterparty in France because the French government closes its borders, then the supplier might find itself excused from non-performance and the contract is automatically discharged, on the basis that it would be illegal to bring the goods into the country. However, the threshold for proving frustration under English law is high and the question of whether a contract is indeed frustrated is likely to be highly fact dependent. This landscape is also changing fast as governments continue to introduce new measures to combat the spread of Covid-19, which, in turn may impact the likely success of a frustration defence.
Insurance Coverage and Covid-19
Whether a business is liable to its counter-parties of course may have little effect on whether its underlying sales are healthy as a consequence of Covid-19. Businesses in the tourism and aviation industries (among others) are facing unprecedented loss of business, as the global population faces lockdown and people are prohibited from travelling, except for essential movement. Such companies are likely to turn to their business interruption insurance policies where possible. However, whether such losses are covered by a business’s business interruption.
policy and/or contingent business interruption policy is also likely to turn heavily on the wording of the clauses in question: traditionally, business interruption policies cover damage to property rather than the impact of contagious diseases, so it is highly likely that many businesses will find their claims being contested by their insurers. Those insurance policies may also contain broadly-worded exclusions for pollution or contamination, so questions may well arise as to whether such exclusions also exclude virus pandemics like Covid-19.
Some policyholders will have more targeted supply chain insurance or other extensions to basic cover, which are more likely to cover them in the event of a claim. However, even these policies can contain similar exclusions for diseases and pollution (particularly in the wake of the previous SARS and Ebola crises), so policyholders will need to look carefully at the wording of the specific provisions of their policies.
Insurer Solvency and Covid-19
A more structural issue is the question of how many insurance companies are going to survive the barrage of claims they are facing. I anticipate a run on insurance policies unlike anything seen in history. The LMX spiral of 1989 – a consequence of questionable reinsurance practices and a series of major global catastrophes – saw the collapse of Lloyds of London as insurers had insufficient capital backing to pay out the number of claims presented. The current crisis reflects that, but is almost certainly likely to be worse, notwithstanding the better capitalisation of the insurance markets following the introduction of the Solvency II Directive by the European Union on 1 January 2016, in the wake of the crash of 2009. Munich Re, for instance – one of the world’s largest reinsurers – may face exposure for tens of millions of Euros in relation to this year’s 2020 Olympics in Japan, now delayed until 2021. It may be able to weather that hit. But for smaller-cap insurance and reinsurance firms, a litany of claims is likely to be catastrophic.
Conclusion
Whether a law firm, or a business, if what I have outlined above covers some of the questions you are facing, do get in touch. The next few months are likely to be extremely challenging, but we are here to assist where we can.
Francis Hornyold-Strickland, 36 Group
Contracts exist to provide certainty. In these challenging times it is imperative for contracts, in addition to the usual suite of clauses, to provide even more certainty by catering for as many additional outcomes posed by the present coronavirus (COVID-19) pandemic. Our view is that the best defence to the threat of contracts being terminated, and the uncertainty that ensues, is proactively revising contracts to make them fit for purposes in the current climate.
Berkeley Rowe has ensured its clients’ contracts have been supplemented with appropriate drafting to facilitate continuity (or the nearest equivalent). Examples include, express provision in force majeure, variation triggers and procedures to extend contract milestones. We have updated our library of contracts to promptly provide clients with the ongoing protection so there businesses are guarded from unforeseen events now and in the future.
With specialists legal advice and carefully crafted contracts, we have not only been able to facilitate contracts remaining enforce but we have provided clients with enhanced frameworks to regulate their commercial relationships.
Akbar Ali, Corporate Partner at Berkeley Rowe