Businesses should carefully consider their contracts and future obligations during the COVID-19 outbreak.
Where a party is unable to fulfil a contract for the supply of goods and/or services exclusively due to the impact of the coronavirus, there are two main potential ways to discharge the contract, namely force majeure and frustration.
What is force majeure?
Force majeure describes an event that is beyond the control of the parties and which ultimately then prevents them from fulfilling their obligations in contract or makes fulfilling the contract impossible.
You should firstly check to see whether your contracts contain a force majeure clause. This may often be presented differently, for example a description of an exceptional event would be considered a force majeure provision.
The second action advisable is to check whether this extends to such an event like a pandemic, or if the clause allows the inference of such an event. Some clauses for example may be wide and reference any event beyond the reasonable control of the parties.
If the contract does contain a force majeure clause, it cannot be assumed that such provisions will necessarily be triggered by Covid-19. This will depend not only on the wording of the provision, but also on the impact which coronavirus may have on performance.
Force majeure – things to consider
- Is force majeure a defined term within the contract?
- Are there any examples provided in the contract such as epidemic, pandemic, or Government sanctions?
- What is the impact of coronavirus on performance?
You will also need to consider if the completion of contract has been completely prevented or if it has been simply made more inconvenient or expensive. If it is either of the latter two then it may not be enough to discharge the contract.
A force majeure clause may also stipulate what is to happen in such an event whether that is a pause, a right to terminate after a certain time, a right to vary the contract or automatic termination. Any clause may also state what will happen if such an event occurs, for example, what happens in respect of payments both past and future.
What is contract frustration?
If a contract does not include an express force majeure clause, the contract may be considered frustrated. Contract frustration occurs when the contract becomes impossible to perform and therefore cannot be completed.
This can often be a high threshold to meet on the basis that performance of the contract must be rendered impossible as opposed to difficult or expensive to rectify. If a contract is frustrated, the contract will immediately be terminated, and both parties released from their future obligations.
As the parties released from future obligations, the goods or service to be provided would not be and future payment would not be required. Frustration would not impact upon the requirement to pay for work done to date.
Where there has been payment up front for work not yet carried out, or perhaps partially carried out, or a deposit has been paid, these sums should be refunded, minus reasonable costs incurred or work done.
One of the key instances in which frustration may occur as a result of Covid-19 is when a contract becomes illegal to perform. It could be argued that because the Government bans certain actions it therefore becomes illegal and impossible to fulfil the contract.
Contract frustration – things to consider
- Is a force majeure clause absence in the contract?
- Do the circumstances meet the high thresholds required, deeming the contract impossible to perform? (as opposed to increasingly difficult or expensive)
- Has any payment already been made for work yet to be carried out?