Coronavirus – can you break your contracts and are you insured?

Coronavirus – can you break your contracts and are you insured?

Many businesses are looking at their contracts and insurance to determine whether they are covered for losses arising from the current pandemic and whether they can cancel contracts in light of the extraordinary developments.

Terms such as “force majeure” are being bandied about as the solution but how do you tell if a particular force majeure clause allows for penalty-free termination of a contract? Or if insurance covers business losses caused by the virus?

What is force majeure?

Force majeure is a phrase meaning superior force and used in legal documents to refer to an intervening act that is entirely outside of a party’s control. Force majeure events often include volcanic eruption, war and earthquake. Many contracting parties are assuming that they can cancel contracts without penalty because Covid-19 is an event outside their control. However, that may not be the case.

In order to declare a force majeure event, there must be a force majeure clause in the contract. English law differs from the law in many other countries by requiring a specific clause. Even if the contract does contain a force majeure clause, the English courts are strict in their interpretation of the clause’s meaning. To use a force majeure clause to protect you against a claim you will need to be able to convince the court that the event was beyond your control, has prevented or hindered your performance of the contract and that you have done all that is reasonable to comply with your obligations under the contract.

Most force majeure clauses include a list of applicable intervening events, such a riot, war, and earthquake. That list may include disease or epidemic, if those terms are not expressly included in your contract then it is wise to look into more general terms in your contract, such as “act of God”. If these general terms are included you could argue that Coronavirus was an “act of God”. When making a claim on the basis of force majeure the courts will look at the amount of the loss that the other contracting party will suffer if you can avoid a claim for non-compliance, in addition to other evidence. Where the loss is significant the court’s interpretation tends to be stricter.

If there is a list of diseases specified under a force majeure clause in the contract and that list does not include Covid-19 then the prospect of convincing a court that it should add Coronavirus to the list is weak. It really is worth taking advice on your rights to cancel the contract before doing so in order to equip you to negotiate a reasonable outcome.

Are you insured?

Standard business insurance is priced by insurers to deal with standard risks. It is therefore unlikely to cover your business for extraordinary risks such as the current pandemic. Some businesses have additional business interruption insurance to cover them for more unusual events, including the break out of what is known as “notifiable diseases”, the Government has confirmed that Covid-19 is a notifiable disease for that purpose. However, that does not mean in practice that insurance cover is in place. Some business interruption policies, like force majeure clauses, list the relevant diseases. If they decide not to cover Coronavirus and list all such diseases covered then even with business interruption insurance there will be no cover for reduction in trade.

Ei Group, the owners of over 4,000 pubs, has informed its pub landlords that their business interruption insurance policies do not cover loss arising from coronavirus. Their insurers, Zurich, will not be including Covid-19 in their list of notifiable diseases. It is ultimately the insurer that determines what risks it is willing to cover and Zurich states that its position is in line with the insurance market. Even if you have these policies in place they may not cover Covid-19 risks until insurers are better able to assess those risks and price their policies accordingly.

You may not have a great deal of advance notice prior to the shutdown of your business. Taking the time now to familiarise yourself with the key terms of your contracts and insurance cover will enable you to manage your business risk should further disruption develop.

For a review of your contracts or insurance policies and advice on your legal options in this rapidly changing market please contact Emma Banister Dean on 01494 478623 or at ebd@blasermills.co.uk