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

Emma Banister Dean of Blaser Mills

With the impact of COVID-19 being felt by businesses more every day, many are looking at their contracts and insurance policies to determine whether they are covered for losses from the current pandemic, and if they can cancel them in light of the developments, writes lawyer Emma Banister Dean.

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

Understand the terminology

‘Force majeure’, meaning ‘superior force’, is a term used in legal documents to refer to an intervening act entirely outside of a party’s control. Force majeure events often include volcanic eruption, war and earthquake.

With this knowledge, many contracting parties assume they can cancel contracts without penalty, because COVID-19 is an event outside their control. However, that may not be the case. It is crucial that businesses read between the lines.

Review your contracts

For a business 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 and, even if the contract does contain a force majeure clause, the English courts are strict in their interpretation of the clause’s meaning.

The courts will look at the amount of the loss that the other contracting party will suffer

To use a force majeure clause to protect yourself against a claim you will need 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, and that list may also include disease or epidemic.

If these terms are not expressly included in your contract then it is wise to investigate more general terms that could be instead, such as ‘act of God’. If these general terms are included, you could argue that COVID-19 was an ‘act of God’.

When making a claim based on 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, the prospect of convincing a court that it should add the virus to the list is weak.

It really is worth taking advice on your rights to cancel the contract before doing so in order to help you negotiate a reasonable outcome.

Check if you are 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 breakout of what is known as ‘notifiable diseases’, and the government has confirmed 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, even with business interruption insurance there will be no cover for reduction in trade.

A case study: Ei Group

Ei Group, the owner 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 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.

Seek expert help

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 risk should further disruption develop.

If in doubt, seek advice from an experienced legal professional who will be able to advise you and ensure you remain complaint.

Emma Banister Dean is senior associate at Blaser Mills Law