COVID-19: Impact on contractual obligations in the travel industry supply chain

In last month’s article we looked at what obligations travel providers have to their customers in the event their holidays are affected by the Covid-19 outbreak. In this article, we will take a look at how the Coronavirus can impact B2B contracts in the travel sector; specifically, the contractual and legal issues arising in English law as a result of businesses in affected countries having to suspend, or even cancel, their operations.

Performing your contractual obligations: the English law position

The travel industry is a service-driven sector, and is reliant on a web of supply and demand relationships which will all be underpinned by contracts. The basic position under English law is that contractual obligations are absolute; this means a party must comply with its obligations regardless of the circumstances, and failure to do so may mean that party is liable to the other for breach of contract. However, in extreme circumstances, there are some exceptions to this rule.

Force majeure events: a get-out clause?

 A well-drafted contract should contain what is called a “force majeure clause”. The underlying principle of a force majeure clause is this: if certain events occur which are outside of a party’s control, that party will be excused from, or can suspend performance of, all or part of its obligations without liability to the other party. If the force majeure event carries on continuously for a certain period, the clause may also allow one or both parties to terminate the contract.

Whether a company can rely on a force majeure clause in the event of business interruption caused by the Covid-19 outbreak, and what this means in terms of contractual obligations and liability, will depend on how the clause is drafted. Some key factors to consider include:

• Does the Covid-19 outbreak fall within the definition of force majeure event?

It is unlikely the Covid-19 outbreak will be specifically covered as a force majeure event. However, the outbreak and any related control measures may be captured by one of the examples commonly listed in standard force majeure clauses such as:

• “epidemic or pandemic” (N.B as at the date of this article, Covid-19 is designated a “Public Health Emergency of International Concern” by the World Health Organisation. If this is upgraded to a pandemic, this may assist parties);
• “any law or any action taken by a government or public authority” (such as travel and export restrictions);
• “shortage of labour” (for example, employees self-isolating); or
• a general catch-all like “any circumstance not within a party’s reasonable control”.

Watch out for wording which excludes events that could have been reasonably foreseen, avoided or overcome; it has been suggested such wording could require businesses to look back to the actions taken during the SARS coronavirus outbreak in 2003 to inform their response to the present outbreak.

• What notice requirements apply?

The affected party may be required to formally notify the other party in writing, and within a specific period after the start of the force majeure event, as a requirement for exercising rights under the clause.

•  What mitigation duties apply?

The affected party is usually under a duty to show it has taken reasonable steps to mitigate or avoid the effects of the force majeure event. Again, the SARS outbreak may provide guidance on the type of steps businesses in particular industries can take to lessen the impact on their business. In the travel industry, the impact on the supply chain may managed by taking some of the following actions:

• Managing staffing levels: Facilitate flexible working for employees, where possible (e.g. for back-office staff). Where a business is reliant on front of house staff (e.g. hotels, airlines, travel service providers), ensure there is a business protocol in place for mitigating the spread of the virus (handwashing, self-isolation in the event a person experiences symptoms or has returned from a high risk country) and ensure all relevant staff are informed of this protocol.
• Maintaining customer relationships and confidence: Some major hotel chains have offered free cancellation at hotels in affected areas. Some travel providers have offset the impact on their customers of airlines cancelling flights and hotels suspending reservations by providing full refunds to people who want them and future flexible travel options to those looking to travel at a later date. It is also important to ensure customers are kept informed of updates and developments, and the preventative measures being put in place (e.g. extra cleaning in hotels, hand sanitisers in toilets, procedures for isolating guests who become ill and referring them for treatment).
• Re-sourcing goods and services: lots of businesses in the travel supply chain rely on sub-contractors to supply them with the necessary goods (such as food, beverages and toiletries) and services (such as cleaning, catering and transport services). Risks can be reduced or removed if businesses ensure they have a viable alternative which can be implemented quickly.
•  Is the clause limited in its scope?

The party seeking to reply on the force majeure clause must prove that non-performance was due to the force majeure event. If the clause requires the event must “prevent” performance, the party will need to show the event has made performance of the contract legally or physically impossible, not just difficult or unprofitable. This is a very high burden of proof. On the other hand, if the clause requires the event must simply “hinder” or “delay” performance, the party will generally only need to show the event has made performance substantially more onerous. A mere increase in the cost of performing the contract, however, is unlikely to be accepted as a reason for non-performance.

Frustration

If there is no force majeure clause in the contract, the common law doctrine of frustration might help. This doctrine exists to relieve a party of its contractual obligations if an event occurs after the formation of the contract, which makes it physically or commercially impossible to fulfil the contract, or transforms the obligation into something radically different. The circumstances in which it can be invoked are very narrow, but it is conceivable that some situations arising from the Covid-19 outbreak might just qualify as frustrating events (for example, if the contract requires performance in a region subject to a state-imposed lock down). If frustration applies, the contract is set aside and the parties will be released from their future obligations. Generally speaking, the financial consequences are:

• Money paid before the frustrating event occurred can be recovered.
• Money due but not paid before the frustrating event ceases to be payable.
• A party who has incurred expenses is permitted, at the discretion of the court, to recover an amount up to the value of these expenses (they can retain this amount from any money they have been paid which they are required to pay back).
• The court may require a party who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a “just” sum for it (regardless of whether anything was paid or payable before the frustrating event).

Practical steps to take

As Covid-19 continues to spread, it is essential to act quickly to ensure business continuity as far as possible, and to mitigate losses which may arise as a result of disruption caused by the outbreak. Now is the time to look at your supply chains, and identify the key area of risk. You may wish to seek legal advice on those contracts which cause particular concern (either because you are worried about defaulting on your obligations, or you are worried about your supplier defaulting), and on the steps you might need to take. You may also want to check your business insurance policy to see if it covers loss arising from disruption caused by Covid-19, and whether you need to take any particular steps to notify the insurers and mitigate your losses.