The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

Check out the FAQ of the country of your interest below and get in touch with our Coronavirus Helpdesk and to set up a free call if you need assistance.

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Ireland

How is Force Majeure defined and regulated in Ireland?

There is no legal presumption of Force Majeure under Irish law. A contract must expressly contemplate a Force Majeure event to be relied upon. Other provisions that anticipate events beyond the control of the parties and that affect the parties’ performance of the contract will also operate in the same way as a labelled Force Majeure clause. Force Majeure clauses are a common feature of commercial contracts in Ireland.

The contract will define what events are captured by the Force Majeure clause. The relevant clause will list events that will constitute a Force Majeure event, typically including acts of God, natural disasters, acts of Government, war, terrorist attacks and strikes. In the context of the Covid-19 outbreak, parties should look for specific references to epidemics, pandemics or disease control activities in its contracts, although it may also be arguable that the Covid-19 outbreak is also an act of God. Counterparties to Irish contracts should also consider the Irish government’s actions to legislate for restrictions on peoples’ movements and forced temporary closures of businesses unless they provide ‘essential services’, which would constitute an “act of Government” thereby satisfying the Force Majeure definition in most contracts.

Widely drafted Force Majeure clauses may also provide that the contract is not limited to prescribed Force Majeure events. Consideration of the breadth of the Force Majeure definition in the contract and whether it covers the event in question will be the first step for the parties to consider.

Coronavirus and the doctrine of Frustration in Ireland

Where the contract does not expressly contemplate a Force Majeure event or an event beyond the control of the parties, an affected party may seek to rely on the common law doctrine of frustration. A contract may be frustrated where performance of the contract is rendered impossible, without default of either party, due to a supervening event that was not within the contemplation of the parties when the contract was agreed. However, the doctrine of frustration has been construed narrowly by the Irish Courts and is therefore difficult to successfully establish.

The doctrine of frustration does not apply where the parties in some way contemplated the supervening event. For example, the existence of a Force Majeure clause precludes the contract from being frustrated because it indicates that the parties were aware of the risks when negotiating the contract and expressly agreed to allocate that risk between them.

How to prove that Covid-19 is as an event of Force Majeure in Ireland?

The party seeking to rely on the Force Majeure clause must demonstrate that:

  1. a Force Majeure event, as defined in the contract, has occurred; and
  2. that Force Majeure event has prevented it from performing its obligations under the contract.

Where a Force Majeure event occurs, both parties should consider whether the event in question is covered by the Force Majeure definition in the contract. For example, specific references to epidemics, pandemics or disease control activities would likely cover the Covid-19 outbreak.

The party seeking to rely on the Force Majeure event must then show that it has been prevented from performing its obligations under the contract. Other Force Majeure provisions may be satisfied where the party’s obligations are simply hindered or delayed. For example, a supplier may be prevented from supplying goods if the goods manufacturer has closed due to Covid-19. However, if the goods manufacturer simply reduces production due to Covid-19, thereby delaying production and making the goods more expensive, the supplier would be delayed or hindered, rather than prevented, from supplying the goods.

Once the party seeking to rely on the Force Majeuree vent has satisfied these conditions, it is likely that the contract will require further procedural steps to be taken, as follows:

  1. serve a notice of the Force Majeure event in writing on the other party, outlining the estimated extent and duration of the Force Majeure event;
  2. take all reasonable precautions to avoid the Force Majeure event; and
  3. take all reasonable endeavours to mitigate the effect of the event.
What is the best course of actions recommended in case either party issues a notice of Force Majeure?
  • The party should issue the notice promptly when it becomes aware that it cannot comply with its obligations under the contract.
  • Both parties should mitigate the effect of the Force Majeure event and minimise any loss incurred.
  • Both parties should check whether there is a termination provision in the Force Majeure clause. Contracts will often provide for termination by the other party where the Force Majeure event persists for a specified period.
  • The paying party (i.e. the party in receipt of the services or goods) should review the contract to establish whether it is obliged to continue making payments, notwithstanding the Force Majeure event. Contracts may expressly require payments to continue during a period of Force Majeure even though the services or goods cannot be supplied.
  • The cessation of the Force Majeure event should also be notified promptly to the other party.
  • Both parties should review all its contracts and compile a table of key provisions to consider whether there is a Force Majeure clause, whether that clause includes pandemic, epidemic or similar terms that would capture Covid-19 and whether there are notice and termination provisions arising from a Force Majeure event.
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