COVID 19 – THE IMPACT ON PERFORMING BUSINESS CONTRACTS

Coronavirus looks set to be the biggest challenge businesses have faced in living memory.

You may well face difficulties in performing contracts which you have entered into, you may have contracted with another party who is struggling to perform the contract. What is the legal position?

The law of England and Wales takes the view that there are very limited circumstances in which contractual obligations can be avoided. The two main “get-outs” are force majeure clauses and the doctrine of frustration. If your contract is governed by another the laws of another country, the position could be different to that under the law of England and Wales.

Force majeure

If you have a written contract, it may contain a force majeure clause. This is a clause which may alter the requirement to perform a contract if certain events occur. Common examples are outbreak of war, strike or pandemic. If the contract contains such a clause, it is likely to absolve a party from delay in performing, or may even allow no performance, in the circumstances specified in the clause in your contract. There are many kinds of force majeure clauses, so the particular wording in your contract needs to be carefully considered.

When reviewing the wording of your contract first consider, whether Covid-19 falls within the matters described as being ‘force majeure’? A few clauses might refer to pandemics, in others there might be more general wording referring to events beyond your “reasonable control”. Consider, what effect has the pandemic had on performance of the contract? Are there things you could have done or can do to enable you to perform? Just because a contract will cost more to perform won’t usually allow a failure to perform.

What does the clause say about non-performance or delayed performance? There are likely to be notification requirements, and the contract may contain a requirement to take certain additional steps. Additionally, the contract might contain a right for one or both parties to terminate the contract.

Frustration

If you don’t have a written contract or a force majeure clause, there is the common law doctrine of frustration to consider. The courts have kept the application of frustration to a limited scope. A party can be discharged from a contract and the contract itself will end where the change in circumstances make it physically or commercially impossible to perform the contract or would render performance radically different to that which was intended by the parties. For example, a shutdown of sufficient length mandated by a country in the place of contract performance could satisfy this requirement but as always, the specifics of each case need to be looked at and considered.

Obviously, the current situation following the outbreak of Covid-19 is changing daily, as will the impact on businesses. However, the fact that businesses will be impacted is certain and it is worth keeping your contractual obligations under constant review at this time.

If you have any questions relating to performance of a contract in which you or your business are involved, please contact our Corporate Commercial team or our Litigation and Disputes team.