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Coronavirus - Commercial contracts - Ireland

  • Ireland

    12-03-2020

    On 11 March 2020, the World Health Organisation (WHO) increased its risk assessment of Coronavirus (COVID-19) to ‘a pandemic’. While, to date, the impact of COVID-19 has varied from country to country, in Ireland we have seen a ramp-up of protective measures in recent days. On 12 March, Taoiseach Leo Varadkar, while introducing “several important and unprecedented measures to protect public health” stressed that we have “not witnessed a pandemic of this nature in living history and we are in uncharted territory”. While Tánaiste Simon Coveney flagged that “never before has such drastic action been taken in the face of a public health threat”.

    The occurrence of the COVID-19 pandemic is likely to hinder performance of commercial contracts in every sector and commercial entities will likely experience disruption and be prevented from meeting certain obligations under contracts.

    Accordingly, organisations may need to consider the contractual issues arising from the adverse impacts they may experience because of COVID-19. The general rule under Irish law is that a business or person will be liable for a failure to comply with its contractual obligations. There are certain exceptions to this general rule, in the context of COVID-19, the two key exceptions are “force majeure” events and, in extreme cases, the doctrine of frustration.

    Force Majeure

    Many commercial agreements will include force majeure provisions relieving a party from its obligations under the contract upon the occurrence of certain unforeseeable events such as natural disasters, “acts of God”, nationwide strikes etc. This provision will also frequently extend to the occurrence of pandemics. While it is highly unlikely that COVID-19 will be specifically referenced as a force majeure clause, it may be covered depending on the definition of the clause in a specific contract.

    While the initial focus of any party seeking relief is likely to be the force majeure clause, even where a pandemic of this nature is suitably covered, there are likely to be hurdles to overcome. In particular, it is likely that a causal link will need to be established between the COVID-19 pandemic and the failure to perform.

    If challenged, the Irish courts are likely to consider the precise language agreed by the parties in the agreement.

    Where the clause simply refers to “unforeseeable events” and there is ambiguity as to whether an outbreak of this nature is captured by the specific text of the provision, the date on which the contract was entered into or renewed may be relevant (where the provision itself is not considered to be void for uncertainty). If the date appears to be subsequent to the outbreak of the disease becoming known, it may challenge any suggestion that the outbreak is “unforeseeable”.

    Frustration

    A party will not be relieved from its obligations under a contract simply because performance has become difficult or expensive to perform. The doctrine of frustration can, however, be considered in certain circumstances. Generally speaking, this will only apply where the subject matter of the contract has been destroyed or a party is unable to perform, perhaps due to personal incapacity. In practice, the threshold to meet in order to successfully claim frustration is very high. However, this may become increasingly relevant where government shut-downs or international restrictions prevent performance of the contract being possible.

    Business Continuity Planning

    Many commercial agreements will impose obligations on parties to have in place robust business continuity plans to ensure continuity of service. Businesses will no doubt be examining what they have put in place or agreed in their contracts in this respect, particularly if plans were designed without a public health emergency in mind. Often contracts will include obligations on the parties to review business continuity plans at regular intervals during the term of the contract. As a minimum these plans should take into account current WHO recommendations for the public protecting themselves and travel advice to enable all in the business to play their part in preventing the spread of the disease as well as reviewing local government advice. They should also be reviewed for new or different strategies in respect of working from home, business travel or a transfer strategy for functions that could be moved locations. Other actions should include reviewing technology to ensure it can support increased remote working, checking insurance coverages and having a clear picture of critical members of your supply chain.

    Notice provisions

    Regardless as to what contractual remedy is being sought, it is important for parties to carefully consider their obligations as regards delivery of notices which will be specified in any commercial agreement. Where, for example, a party attempts to rely on a force majeure clause, often that clause will require delivery of notices to the other party within a specified time frame of the force majeure event arising. The requirements in the contract may also dictate what information must be included in the force majeure notice for it to be valid.

    What action can your organisation take?

    As COVID-19 continues to spread globally, businesses should carefully consider their ability to trigger or resist claims of force majeure in their contracts. However, with what is becoming a long term situation, triggering force majeure may simply result in triggering termination of the contractual relationship, not necessarily the outcome that will be required. The focus needs to shift to longer term solutions.

    Organisations should:

    • evaluate current agreements for the content of their force majeure clauses and be aware of notice obligations specified in commercial agreements where relief is being sought;
    • be aware of notice obligations specified in commercial agreements where relief is being sought; and
    • review and implement any existing business continuity plans to ensure COVID-19 or pandemics are addressed.

    The impact of COVID-19 is likely to extend beyond what has been included in commercial agreements. In particular, any business will need to be concerned with how it treats its employees at this time. Click here for a commentary by our Employment Law team on COVID-19 in the workplace - Employment guidance update.

    As there are new developments every day, if you would like to discuss the legal implications of COVID-19 on your organisation, please contact Peter O’Neill or Marie McGinley.

    For support on legal issues facing your business in light of the outbreak of Covid-19, please visit our Coronavirus hub to get our latest information and guidance.

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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