COVID-19 – Who Bears the Loss?

Labour markets and supply chains face unprecedented disruption as the COVID-19 pandemic sets in. With widespread bankruptcies likely to follow, who will be held liable?

The COVID-19 pandemic now dominates every aspect of business and personal life, creating enormous public health and economic challenges across the world. In addition to the large-scale loss of life, we are facing unprecedented disruption to work and business activity. Even if some sectors are bailed out, a glut of insolvencies and bankruptcies seems inevitable. But where will the axe fall? Chris Robinson, a specialist corporate lawyer at Excello Law, explains.

Global supply chains in Europe, the current centre of the pandemic, face protracted disruption as the COVID-19 crisis highlights their fragility: the failure of one link can cause extensive disruption throughout the chain. Supply chains and labour markets are often complex and unstructured, even in ordinary circumstances. But COVID-19 is extraordinary:  the myriad effects of losses created by it will be diverse, disparate and on a scale never previously seen.

Ideally, supply chains are configured with back-to-back contracts and pay-when-paid clauses that allocate the loss appropriately and proportionately across the supply chain, or to parties who are insured. But this is the exception rather than the rule. The reality is that the loss will often fall on the weakest link in the chain, the small business who has not been able to negotiate let-outs, either with their customers or suppliers. You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.

This raises many questions, not least concerning remedies provided by the law when the performance of a contract becomes impracticable. For example, is a party liable for breach of contract if they simply cannot comply? If the contract terms provide no let-out, then (under English law) the only legal escape is the legal concept of frustration.

You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.

A contract is frustrated if something happens after the date of the contract that is not the fault of either party that makes further performance impossible or illegal, or is so fundamental that it strikes at the root of the contract, and is beyond what was contemplated by the parties when they entered into it. Frustration ends the contract entirely, with basic rights for advance payments to be refunded and parties to be reimbursed for expenses incurred.

Circumstances arising from COVID-19 are certainly capable of amounting to frustration, but difficulties in performing, extra costs or delays would not be enough. Long-term contracts, or employment contracts, are unlikely to be frustrated.

Many contracts contain force majeure clauses, allowing the parties to suspend performance for a period of time and/or terminate the contract without liability on either side. Whether a public health emergency amounts to force majeure will depend on the wording of the clause: the situation must be beyond the control of the affected party. If compliance with Government advice is voluntary, that might not help to bring the situation within the force majeure clause. Similarly, the presence of a force majeure clause may mean that the contract is not frustrated: if the agreed terms deal with a situation, that situation will not frustrate the contract. Force majeure clauses often require formalities, such a giving notice to the other party.

Even though the economic havoc created by COVID-19 pales into insignificance compared to the scale of human tragedy it continues to cause, the health of the economy also has a very significant impact in keeping people alive and well. As damage continues to spread throughout the economy, the losses will be uneven, affecting some a great deal more harshly than others. Much of the cost will be felt through business failures, leading to many thousands of people losing their jobs. Employees, business owners, shareholders and pension fund members will bear the cost, but not in an equitable way.

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