March 20, 2020
The impact on all of us caused by the COVID-19 outbreak and the national response to it is like nothing many (or any) of us have ever seen in our lifetimes.
We have had the initial shock of seeing our lives being so fundamentally changed in a way we could never have imagined in only a few days. Many uncertainties undoubtedly still lie ahead of us and it seems likely that difficult choices will have to be made for many businesses.
Businesses up and down the country will have committed themselves to supply all manner of goods and services. But with so many people having to undertake social distancing, self-isolation or suffering with the symptoms of COVID-19, the ability to fulfil at least some of those contractual obligations may now be seriously in doubt, or worse.
Are businesses still committed to fulfilling the obligations they have entered into? Will they be in breach of contract, and liable for the consequences, if they don’t?
Is there a way to avoid having to fulfil contractual obligations but not be liable for damages for breach of contract? In certain circumstances the answer is “yes”!
If this is an issue for you, read on.
Force majeure
If the contract is in writing and contains a term that expressly provides that some of the obligations need not be performed in extreme situations, provided
- the occurrence of the COVID-19 pandemic is within the range of events that the clause is intended to cover;
- performance has been prevented, hindered or delayed as a result of COVID-19; and
- there was nothing that could reasonably have been done by the party who cannot perform its obligation to avoid or mitigate the impact of COVID-19 upon the ability to perform
then non-performance might not be a breach of contract.
Extreme caution is needed, as well as careful analysis of the “force majeure” clause that is potentially going to be relied on, to ensure that non-performance of any particular contract will not still end up being a breach of contract. A key issue often is whether the clause covers the particular event on which the defaulting party intends to rely. The fact that performance might have become substantially more difficult or expensive to perform may not, on its own, be enough to excuse non-performance of contractual obligations.
In contracts between a business and consumer, where it is the business that cannot perform its obligations, the question of whether the clause is fair and reasonable in accordance with consumer legislation and has been properly incorporated into the contract, and therefore can in fact be relied upon, will also need consideration.
What if the contract has no express “force majeure” clause? – Frustration
“Frustration” (as well as having the common meaning, with which we can all identify at the moment) has a legal meaning in relation to contracts that can no longer be performed because of unforeseen events.
If the contract has no force majeure clause and/or the other provisions of the contract do not provide a viable means of avoiding the obligations entered into, there is potentially scope to argue that the contract has been frustrated by the COVID-19 outbreak and/or the government’s actions with regard to the response to it.
It is necessary to show that an unforeseen event outside the control of the parties and occurring after the contract was agreed has made the contract impossible to perform, or that performance has become radically different from that which the parties intended that it would not be fair for the parties to have to fulfil their obligations.
There are examples of the outbreak of war combined with actions taken by the government causing contracts to become frustrated. As with force majeure, there is a distinction to be drawn between performance becoming more costly and being prevented. An important question (which is likely to be argued in the courts at some point in the future) is whether the fact that there have been pandemics and warnings that further pandemics were likely means that COVID-19 is not an unforeseeable event for these purposes. The extreme measures that so many governments have taken in response might be said to be unforeseeable though.
COVID-19 will affect the performance of different contracts in different ways and not all of them will necessarily have the effect of frustrating the contract. It would be necessary to look at the particular circumstances of any situation.
The effect of frustration is that all parties’ obligations under the contract would be brought to an end immediately and this might have undesirable commercial (and in some instances regulatory) consequences so such consequences need to be carefully thought through before asserting that a contract has been frustrated.
In these uncertain times, there is much that is unknown and possibly much to fear but we cannot let that allow ourselves to be paralysed by such uncertainty and fear. You may have heard this said before but now is the time to take stock and:
- accept the things you cannot change;
- have the courage to change the things you can; and
- have the wisdom to know the difference.
We want to help businesses get moving forward again and emerge from the current crisis as strong as possible. If you think we can help you, please get in touch. We are happy to take calls on a no-obligation basis and provide whatever help we can.
We are happy to take calls on a non-obligation basis. Please contact Andrew Farrell on 0161 667 3686 or andrewfarrell@prosperitylaw.com
