As you will know, there are many legal repercussions as a result of the coronavirus pandemic. We can assist with all such issues within our legal focus. Indeed, over the last couple of weeks, we have spent many hours advising our clients, often on an urgent basis, in relation to property issues, commercial contracts, construction and JCT contracts, and all manner of other issues that have arisen as a result of the pandemic and the associated lockdown.
We have always been very keen to assist individuals and businesses, not just in good times, but also in bad. We have an experienced team that can provide urgent advice and assist you in finding the best way forward. Whilst each case is, obviously, individual on its facts, we provide some general guidance in relation to issues that have repeatedly arisen recently.
COVID-19 and contracts
As a result of this pandemic, businesses may either be unable to fulfill their contractual obligations or suffer loss because suppliers cannot fulfill theirs. Under normal circumstances, a claim for breach of contract would arise. If it is clear that the contractual failure was principally caused by the COVID-19, however, a claim for breach of contract may not be viable for the following reasons:
- There is an applicable force majeure clause in the relevant contract i.e. a clause that deals with how the parties’ obligations are affected by an event that affects one party’s ability to perform
- The common law doctrine of frustration applies
To be sure, the fact that these defences could be available does not mean that a business can assume it will get away with using COVID-19 as a general excuse for any contractual failure.
Parties should therefore review their key contracts if they think there is a risk that COVID-19 could cause a breach of the contract and assess what pre-emptive measures could be taken to avoid this. Parties may also consider implementing a communication plan to engage with the counterparties of these key contracts throughout the affected period.
1. Force majeure clauses
A force majeure clause typically excuses one or both parties from performance of the contract in some way following the occurrence of certain events.
The first issue to check is whether a pandemic is specifically mentioned in the definition of force majeure in the relevant contract. If the definition includes events beyond a party’s reasonable control, this may be sufficient but will not be guaranteed to succeed and will depend on the drafting, circumstances, intention of the parties and the extent to which this can be proved.
The second issue to check is how the force majeure clause operates. If it provides that the relevant triggering event must “prevent” performance, the relevant party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable.
2. Frustration of contracts in the event of a pandemic
The doctrine of frustration applies where a significant change of circumstances renders performance of a contract radically different from the obligations that were originally undertaken. Such a change in circumstances must be due to an outside event or change of situation that occurs without the fault of the party seeking to rely on it.
The courts are typically reluctant to find that a contract has been frustrated. Express provision in the contract for the event in question (such as a force majeure clause) will normally prevent the contract being frustrated. A contract will not be frustrated simply because it becomes more difficult or expensive to perform or because the business has been let down by another supplier.
When a frustrating event occurs, the parties are excused from further performance and are not liable for damages for non-performance. However, the contract will be permanently frustrated: temporary frustration (in the sense of temporary suspension) of the contract is not recognised. The courts cannot amend the terms of the contract to reflect the effects of the supervening event.
The Law Reform (Frustrated Contracts) Act 1943 governs certain consequences of frustration. Except where otherwise agreed by the parties, the Act permits recovery of monies that were paid under the contract before it was discharged, subject to an allowance (at the court’s discretion) for expenses incurred by the other party.
If you have been affected by any contractual issue related to the coronavirus pandemic, please call 020 7963 8690 or email James Naylor (Managing Partner) to receive a FREE 30 minute consultation.
NB: if you are a contractor or employer involved in construction, please see our separate article on how construction contracts may be affected by the coronavirus.