Contracts and Coronavirus - What are your rights?

The world is currently gripped by the outbreak of COVID-19. For many businesses, this has made performance of contractual obligations difficult or even impossible. Many factors have come in to play: travel restrictions disrupting supply chains or leaving employees stranded, staff self-isolating, pre-emptive office closures and social distancing just to name a few.

This is hitting businesses hard, with many struggling to keep afloat and looking at ways to minimise their exposure.

If you think COVID-19 is likely to affect a party’s ability to perform a contract, what can you do? In this article, Dispute Resolution Partner Satnam Chayra and Associate Gary Pitt explain the contractual rights which could assist.

Termination of contracts

Many contracts contain express provisions for termination. If so, the starting position would be to check whether the termination rights are invoked.

If the contract is not for a fixed period and has no right of termination, it may be terminable on reasonable notice, and what’s reasonable will depend on the facts of the case.

Force Majeure

Most contracts contain ‘force majeure’ clauses that, on the happening of certain events, may excuse a party from performing its obligations or allow for extensions of time or suspensions, variations or even termination of the contract.

Whether or not COVID-19 constitutes a force majeure event will depend on the drafting of the contract.

Some contracts will set out the events that are intended to constitute a force majeure event. So, if pandemics or epidemics are listed, COVID-19 will be covered. Further, “changes in law”, “government action” or other such phrases may give the parties scope for arguing that COVID-19 is a force majeure under the contract.

Other contracts will refer to force majeure in broad terms eg “an event beyond the reasonable control of the parties”. Such a clause would allow the parties to argue that COVID-19 is a force majeure event, but this will be a matter of interpretation and will depend on the specific wording of the clause.

However, it is not always enough for a force majeure event to occur; the clause may be drafted such that it is only invoked where performance of the contract is no longer possible. So, if your staff are quarantined but able to work remotely, the force majeure clause may not assist, even if it means performance of the contract has become more costly.

Frustration

Frustration is a complex area of law which operates to automatically and immediately end a contract where an event occurs which renders performance of the contract impossible/illegal, or makes the obligations radically different from those agreed.

The change in circumstances must be due to an outside event that occurs without the fault of the parties seeking to rely on it.

A contract is not easily frustrated, and inconvenience, additional expense, loss or hardship stemming from COVID-19 is unlikely to be enough. Further, if another clause in the contract makes provision for COVID-19 type situations (eg plague or epidemics in force majeure clauses), frustration is unlikely to be available.

Price variation clauses

These types of clause are few and far between but, in times of economic downturn, they could provide an invaluable source of financial relief for businesses if the contract has them.

What if none of the above apply?

Pick up the phone! Everyone is impacted by COVID-19. If possible, the parties should have a discussion about the issues and what can be done (if anything) to work together to get through this difficult time.

If this is not possible, the strict position is that the obligations will need to be performed and, if they can’t be, there will be a breach of the contract. In that scenario, it may be worth considering whether any losses are covered by your insurance policies.

Should you require advice on performance of contracts in light of COVID-19, or drafting contracts moving forward, please do not hesitate to contact us. 

The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.