Coronavirus has left us all full of anxieties, uncertainties and questions. Whilst it may not be the first problem that jumps to mind, the question of what happens if one party to a contract is unable to perform its obligations is one that many businesses will be facing at this time. With unprecedented measures being taken by the Government to tackle coronavirus, and with perhaps more draconian measures still to come, what happens if businesses, as a result of these measures, can no longer perform their obligations under contracts that they signed up to?
In English contract law, the wording of the contract is usually king. If you sign up to it, you’re usually held to it! So it’s no surprise that the answer to the question of whether there are any means by which to excuse yourself from, or suspend performance of, your obligation(s) under a contract, is primarily found in the wording of the contract itself.
Many contracts will contain a provision known as a “force majeure” clause, which provides that a party will not be liable for its failure to perform its obligations under a contract if there has been an event that triggers the clause. So, what types of event will trigger such a clause?
"Force majeure" translates literally from French as "superior force”. It refers to what we would perhaps term an Act of God – including natural events such as earthquakes and typhoons, but also disruptive events of human origin such as war, terrorism and industrial action. The motivation behind including these types of clauses in a contract is to enable the parties to deal with events that are beyond either party’s control. However, they can be drafted as narrowly or widely as the parties wish.
Some “force majeure” clauses list the types of events that trigger the operation of the clause. For example, now that the World Health Organization is calling Coronavirus a pandemic, clauses which list “pandemic” in the list of potential trigger events will be activated. Other contracts will provide a more general test, which is usually whether there has been an event beyond a party's reasonable control. This may be sufficient wording to trigger the clause in the current circumstances, but this will depend on the drafting of the clause itself. We at Knights are more than happy to review any contracts that you are in any doubt about. Going forward, you may wish to amend your standard terms to add a list of “force majeure” events (including epidemic or pandemic), or draft new contracts containing a list of “force majeure” trigger events. This is also something that Knights can assist with.
The trigger event may cause the clause to be activated, but you are not out of the woods yet. Depending on the drafting of the clause, you are still likely to have to prove that the trigger event caused the non-performance by preventing, hindering or delaying performance (case law, as established in Intertradex v Lesieur , provides that it must be the sole cause).
If the clause provides that the trigger event must "prevent" performance, you must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. But clauses containing the words "hinder" and "delay" will be satisfied if performance is substantially more onerous as a result of the trigger event. An increase in the cost of performing the contract would, however, be unlikely to be enough to trigger such a clause. A party would also have to demonstrate that it has taken all reasonable steps to avoid or mitigate the event, and its effect on performance of the contract. You will be expected to evidence that you have explored any other ways of performing the contract, even if more difficult or expensive (an extremely important practical tip: document everything you do, since the burden will fall on the party relying on the clause to prove that it has been satisfied).
The question of performance is of course going to be extremely fact sensitive, particularly due to the fact that the various measures put in place by the Government to tackle coronavirus will have varying effects and impacts on different industries and businesses. Again, if you are in any doubt, we at Knights are experienced in this area, and happy to advise you. We urge you to contact us as soon as the question arises in your head, given that there may be notice requirements under the contract if you seek to rely on such a clause.
In the absence of an express “force majeure” clause, the common law doctrine of frustration may apply. The doctrine of frustration applies where a significant change of circumstances (an outside event or change of situation where neither party is at fault) renders performance of a contract radically different from the obligations that were originally envisioned by the parties.
Frustration only applies where performance of the relevant obligation has become impossible, so it’s usually a higher threshold than is set under a force majeure clause, and won’t be met if performance has merely become more difficult, expensive, or if you’ve been let down by someone in the supply chain. Courts are typically reluctant to find that a contract has been frustrated.
Then again, we are operating under completely unprecedented circumstances. An established example of a frustrating event is where a subsequent change in the law or circumstances makes performance of the contract illegal - this is not completely beyond the realms of possibility if the country is in “enforced lockdown”.
When a frustrating event occurs, the parties are excused from further performance and are not liable for damages for non-performance of their obligations. The law in this area is completely inflexible however, because once the contract is found to have been frustrated, this finding is not reversible. The contract will be permanently frustrated. Temporary suspension of the contract is not recognised and the courts will not amend the terms of the contract.
The Law Reform (Frustrated Contracts) Act 1943 provides that, except where otherwise agreed by the parties, the sums paid under the contract before it was discharged can be recovered, subject to an allowance (at the court's discretion) for expenses incurred by the other party.
Even if the above does not assist you, or even if you are merely uncertain of the position and want to maintain a cooperative relationship with the other party to the contract, you can always try to agree a variation of the contract with the other party! Of course, this requires both parties to agree (and there may be leverage in referring to your rights under an existing force majeure clause or the common law of frustration), but in the circumstances you may find through dialogue that contract variation works best for both parties or that the other party is sympathetic to the circumstances we are all facing due to the effects of the pandemic. If you do decide to vary the contract, make sure that you follow any formalities required under the existing contract (a lot of contracts provide that any variations must be in writing and signed by both parties). You may wish to build in some flexibility, given that there is a lot of uncertainty at the moment surrounding how long this pandemic could last or what the world will look like when we come out of it! If you need any assistance with drafting or advice relating to a contract variation, feel free to get in contact with us here at Knights.
Finally, just a quick note to state the obvious. Before you do anything such as not performing your obligations under a contract or attempting to agree a contractual variation, check your insurance policy documentation to ensure that you will be covered. Some insurers may expect you to take certain steps before they are willing to provide cover.
If you would like any further information on any of the above, or would like to discuss your particular circumstances and how Knights could help, please contact a member of our Dispute Resolution team.