Blog - 18/03/2020
COVID-19 and Contract Enforcement
Over the last few weeks, we have seen the number of coronavirus (COVID-19) cases worldwide accelerating at an unprecedented rate (the latest figures exceeding 43,000), the World Health Organization (WHO) classifying the situation as a ‘pandemic’, and an increasing number of countries closing their borders.
Businesses have not only seen their share prices tumble, offices close and supply chains disrupted, but are now facing a prolonged period of uncertainty. Companies trying to ride the wave in these tumultuous times will no doubt be looking at existing contracts that they have in place with customers and suppliers, some of which include obligations which may no longer be realistic.
This blog focuses on whether the impact of the coronavirus outbreak would constitute a frustration of a contract or whether relief could be sought from a force majeure clause in an English law contract.
Coronavirus and Frustration
The concept of Frustration provides that a contract may be terminated in the event that something happens after the date that the contract was entered into, which subsequently makes it physically or commercially impossible for one or both of the parties to fulfil the contract.
In these circumstances, both parties are automatically released from their obligations under the contract going forward and (except where otherwise agreed) are entitled to recover monies paid under the contract up to that point for expenses incurred.
Whilst Frustration carries a high threshold, it may be possible to claim that the coronavirus pandemic has frustrated a contract. Performance of a contract becoming more expensive, difficult or onerous is not sufficient to constitute frustration of the contract.
A contract would not be frustrated due to an unforeseeable event that did not otherwise change significantly the contractual rights or obligations from what the parties could reasonably have contemplated when they entered into the contract (for example, where the contract requires performance in a region that is subject to a state-imposed lockdown). However, given the unprecedented schedule of events over the last few weeks, it may be the case that the coronavirus pandemic does in fact fundamentally change the contractual rights or obligations to be performed such that its performance is radically different from what could have been originally contemplated. In circumstances such as these, the parties may be excused from performing the frustrated contract.
Coronavirus and force majeure
If frustration of the contract is not possible (or indeed suitable), contracting parties might have recourse through the operation of a force majeure clause in a contract.
A force majeure clause allows one (or both) parties to extend the time during which they are permitted to perform certain obligations under a contract following the occurrence of specified events e.g. extreme weather, wars, strikes, government action, that affect their ability to perform their obligations under the contract. It provides that since certain events are out of either party’s control, that party is relieved from performance of all (or part) of its obligations and will not be in breach of the contract as a result.
The threshold for proving the impact of a force majeure event is lower than the doctrine of Frustration and results in the suspension of the performance of the contract rather than an automatic discharge of the contract (as is the case with Frustration).
Force majeure clauses are typically construed narrowly, but it is worth noting that where definitions of a ‘force majeure event’ have a list of specific events followed by broader ‘catchall’ wording such as ‘any other cause beyond the parties’ reasonable control’, such wording will have its natural wide meaning and is not qualified by the preceding list.
Whether the coronavirus pandemic would trigger a force majeure clause under English law would need to be determined on a case-by-case basis in light of the wording in the clause. If the definition of force majeure includes ‘epidemics’, ‘diseases’ or similar language, it is likely to be triggered but the party seeking to rely on the clause must still prove, on the balance of probabilities, that the force majeure event has occurred and that it has prevented or hindered performance under the contract and that the party’s failure to perform was due to circumstances outside its control.
Conversely, if the coronavirus pandemic is not specifically covered as a force majeure event, the party claiming a force majeure event may have to rely on other general force majeure wording or commonly used language in force majeure definitions with regard to political interference where a government decision or administrative action prevents the performance of an obligation.
Furthermore, the WHO’s designation of the coronavirus pandemic as public health emergencies of international concern (PHEIC) may be able to support a party’s position of a force majeure event. A PHEIC is defined as “an extraordinary event which is determined to constitute a public health risk to other States through the international spread of disease; and to potentially require a coordinated international response”.
The scope of the wording of a force majeure clause would need to be considered in application to the facts – does the clause exclude events that could have reasonably been provided against, avoided or overcome? An objective approach of the ‘reasonably’ will need to be adopted and some commentators suggest that the approach taken after the SARS outbreak in 2003 should be used as a comparison.
In summary, it would be sensible for businesses to look carefully at the contracts that they have in place to see whether they are able to rely on any contractual wording to delay performance of its obligations which are no longer viable. It is also advisable for companies to open a line of communication with contracting parties to discuss how best to handle any anticipated problems with performance as it is likely that, given the current climate, a compromise can be reached.
For further information on this topic please contact Russel Shear or any other member of our Corporate & Commercial team.
For an update on all the legal implications relating to coronavirus please see here.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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