The impact of Coronavirus (COVID-19) on contractual commitments

Have you considered the impact COVID-19 may have on your contractual commitments?

It’s no surprise that COVID-19 is starting to have a significant impact on UK businesses – businesses are running low on raw materials, supply chains have been disrupted, much of the UK’s workforce has been placed on furlough and some sectors, such as the hospitality and leisure industry, are struggling as the Government has asked some businesses to close their doors to the public.

A disruption on this scale is unusual and it is inevitable that contractual commitments will now be difficult or perhaps impossible to comply with.

Can you rely on a force majeure clause?

A force majeure clause could be relied upon to excuse one or more parties to a contract from performing their obligations under that contract if an event outside their control has occurred, but it depends on the construction of the clause and the circumstances surrounding the force majeure event.

There are a number of things to think about if you want to rely on a force majeure clause:

1. Which contractual obligations are you unable to fulfil, what are the knock on effects of non-performance of those obligations and why?
2. Does the definition of force majeure cover a pandemic such as COVID-19 or perhaps “any circumstances beyond the reasonable control of the parties”?
3. Are you required to notify the other party that you need to rely on the force majeure clause?
4. Does the force majeure clause allow you to suspend performance of your obligations under the contract and, if so, for how long?
5. Does a force majeure event allow a party to terminate the contract and, if so, what are the effects of terminating the contract?

Be mindful that the party seeking to rely on the force majeure clause must prove that the event falls within the clause and that non-performance of that party’s contractual obligations was only due to that event, and there aren’t any other contributing factors. There may be a procedure to follow to validly rely on the clause, and if you rely on a force majeure clause for too long then it may give one or more parties the right to terminate the contract.

What if the contract doesn’t have a force majeure clause?

It is likely that at least one of the parties will run into difficulty at some point over the next few months, particularly if a contract has tight timeframes. It may be sensible to amend a contract to include a force majeure clause to provide protection for all parties and agree how a force majeure event will be dealt with – this will not only help to preserve the commercial relationship between the parties, but potentially prevent the contract being terminated.

If a contract doesn’t have a force majeure clause then the contract may become frustrated. This is where an event occurs after a contract is entered into which means it is physically or commercially impossible for contractual obligations to be fulfilled, or performance of the contract would be radically different from what was originally agreed between the parties, or performance is now illegal. This cannot be an event that results from a party being at fault.

If a contract is frustrated it is automatically discharged, the parties to the contract are excused from their future obligations and no party can claim damages for non-performance. Any money or benefit received before the contract became frustrated must be repaid or returned, and any money due before the contract became frustrated, that hasn’t been paid, ceases to be payable. However, a party may be entitled to reclaim expenditure or keep hold of a sum equal to the value of any expenditure incurred in connection with the contract before it became frustrated.

A party seeking to rely on the doctrine of frustration under English law will need to show that the frustrating event affects the root of the contract and it is entirely beyond what was originally contemplated by the parties when the contract was entered into.

It is not possible to rely on the fact that it is now more expensive to perform obligations under a contract or that a supplier has let a party down. There must be no alternative method of performing the contract.

The Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 requires certain businesses to close for the foreseeable future so it may be reasonably straightforward for those businesses to prove frustration in certain situations, but at the moment there isn’t any Government legislation dealing with the wider impacts of COVID-19 on commercial activity that will help other businesses do the same.

This is a tricky area of law and in practice it is hard to prove so we would always suggest seeking legal advice before you claim a contract is frustrated. The doctrine of frustration doesn’t apply to all types of contracts and if there is a clause that potentially deals with the effects of COVID-19, such as a force majeure clause, then it may not be possible to claim that a contract has become frustrated.

What can you do to protect your business?

Communication is key. It is likely that many businesses are in the same boat and looking for ways to bring contracts to an end to avoid breaching their contractual obligations so openly discussing the situation with the other parties involved is a good first step.

It may be possible for parties to agree a course of action, or amendments to a contract, or a side letter, to help navigate these difficult times. This can help to preserve the commercial relationship between the parties and ensure the contract doesn’t come to an end.

You may also have business interruption insurance that can provide some protection.

At Furley Page, we can provide you with sensible, commercial advice to help you to manage your contractual obligations during the COVID-19 pandemic. We can help you to negotiate and agree a plan of action with other contractual parties to ensure you do not breach your obligations under a contract, carry out a review of your contracts to ensure you have sufficient contractual protection in place, and advise you on how to bring a contract to an end.

To find out how we can help you contact Will King or a member of our Corporate Team on 01634 828277.

PLEASE NOTE: This article was up to date at the time of publication on 15 April 2020.