COVID-19 (coronavirus) and the impact on Contract Law
As the virus develops and more announcements are made relating to the protective measures and restrictions to help manage the spread of the Coronavirus, businesses may find that they are unable to meet their contractual obligations. Consumers will also be impacted.
The virus will have a profound impact on trade given the lockdowns, quarantines, social distancing and travel bans.
How COVID-19 could affect contractual obligations
You can’t go on holiday, you can’t have your wedding reception and that holiday cottage you’ve booked for the week is no longer an option because you are not allowed to travel. Will you have to pay next term’s private school fees when there will be no school?
Many contracts contain a force majeure clause which specifies types of events that may prevent, hinder or delay the performance of the contract without being a breach of contract. It essentially excuses parties from the performance of the contract due to an external event without any liability. The event must constitute a legal or physical prevention, the fact that it is more difficult or more expensive will not qualify as a force majeure event.
There is no common law doctrine of Force Majeure under English law. Therefore whether COVID – 19 is covered by a Force Majeure event will be down to interpretation of each clause. Some clauses will have an exhaustive list of events that will be covered by the clause and some will have wording that relates to some other event outside of the control of a party.
The likelihood of a Force Majeure claim is increasing with each announcement that is made and businesses will need to review their contracts as to whether they include a Force Majeure clause and whether the clause is sufficiently wide enough to cover COVID-19.
Businesses should also review what specific notice requirements there are which relate to invoking the Force Majeure clause.
The burden is on the party seeking to rely on the Force Majeure clause to prove that its inability to perform was caused by the event.
If there is no Force Majeure clause parties may be able to rely on the doctrine of Frustration. Frustration is difficult to prove but may be increasingly relied upon given the current economic conditions.
Frustration allows a contract to be discharged where the performance of the contract is impossible because there has been a significant change in circumstance and neither party is at fault.
The test is strict and a contract may be frustrated where:
1. The frustrating event occurs after the contract has been formed;
2. The event is beyond what was contemplated by the parties;
3. Neither party is at fault and
4. The event renders performance impossible.
The key question will be that the performance of the contract will have to be impossible rather than just more difficult.
Frustration results in automatic termination and therefore it may not be commercially the right decision given the current climate as the impact of COVID -19 is temporary.
Each contract will turn on its own interpretation of each Force Majeure clause and rather than invoking the Force Majeure clause businesses may wish to engage in discussions with the other party to reach a mutually agreeable solution. It may well be that the consumer is in the same position and may no longer need the supply of goods that is being effected by the supply chain.
We here at Kitsons are available to assist you in any issues that may arise. We will provide a full written advice addressing your personal factual issues and let you have your options for going forward. Please contact David Turner or Lauren Baber.