We are all no doubt feeling some level of personal frustration due to the coronavirus outbreak, whether that’s because we are working from home whilst managing home-schooling or because we were due to go on a holiday which has now been cancelled.
Likewise, many of us have business frustrations in that we’re facing hurdles in continuing to provide our services whilst adhering to the social distancing measures currently in place.
The pandemic has thrown up lots of unforeseen issues for businesses, but what are the options where you may be at risk of failing to deliver on your contractual obligations as a result of coronavirus – for example cancelling an event or suspending sales/deliveries? What about if somebody you are in contract with is not able to perform and meet obligations owed to you?
In terms of the type of contract which may be affected by these issues, it could be any commercial or property contract. Some examples may be a contract for the supply of goods, or an agreement for lease with build obligations, or it may be contract to supply professional services.
We cannot determine at this stage the way in which the courts may interpret the law in light of the circumstances brought about by coronavirus, but we can provide advice about the legal principles which may be relevant and how they may help you.
This note, by the head of Commercial Property Zoë Paton‑Crockett relates to two specific legal principles – ‘force majeure’ and ‘frustration’, but our property and dispute resolution teams will be happy to review and discuss with you any query you may have about breach of contract as a result of Covid-19 or otherwise.
The first thing to consider, which may help you, is to check whether your contract contains a ‘force majeure’ clause. It is worth mentioning at the outset that the clause may not be labelled as a ‘force majeure’ clause; it may be referred to as something like ‘exceptions’ or ‘acts of God’ or ‘unforeseen circumstances’ or similar. It is important to check not just the labelling of any provisions, but also their effect.
A ‘force majeure’ clause will normally set out that a contract may be cancelled, or certain obligations suspended or waived, if a particular event occurs. The list of events of ‘force majeure’ are normally things which are considered to be out of either party’s control, and extensions of timescales in a contract due to an event of ‘force majeure’ normally correspond to the delay introduced by the event of ‘force majeure’.
One example would be a date for delivery of goods being extended due to an event of ‘force majeure’ under a supply contract, or another would be an extension to the date for completion of certain building works under an agreement for lease. Likewise, certain types of leases include ‘force majeure’ provisions in relation to the landlord or management company’s obligations to supply services – often they would be relieved of those obligations during any period when an event of ‘force majeure’ is occurring.
Check the contract
There is no statutory definition of ‘force majeure’ so the contractual provisions in each scenario will govern what may constitute an event of ‘force majeure’ and the effect of that event on the obligations contained in a contract.
The starting point therefore, is for any business facing difficulties, to check what their contract says and specifically, to check whether any provision is made for delays or release of obligations in the event of a pandemic, such as Covid-19.
Some examples of ‘force majeure’ events are: acts of God, epidemic or pandemic, terrorist attack or armed conflict, nuclear or chemical contamination, labour or trade disputes/strikes and adverse weather conditions. You will see that from this non-exhaustive list that the intention is to ensure that where an event is beyond a party’s control, that party is not liable for continuing to perform obligations or to comply with certain timescales where it would be impossible to do so.
The list of events of ‘force majeure’ drafted into a contract may be depend on the nature of the business governed by the contract, what the parties may consider to be outside of their control and what events may have an impact on the performance of the contractual obligations.
For example, a property developer may be concerned to include things like unavailability of certain materials or a delay by a supplier as events of ‘force majeure’, whereas a logistics company who delivers goods may be more concerned about travel bans or road closures.
The World Health Organisation has declared the coronavirus outbreak to be a pandemic and therefore if ‘pandemic’ has specifically been included as an event of ‘force majeure’ in your contract, then the declaration by the WHO may help you establish that the ‘force majeure’ provisions apply in this case.
How does it work?
The next thing to do, is to check the effect of your ‘force majeure’ clause and how it may operate and ultimately, help you.
If the provisions are drafted quite narrowly, you may only be able to rely on them if you can prove that performance of your obligations is impossible, not just difficult or more expensive. If the provisions are more generous however, then they may allow you to rely on the event of ‘force majeure’ where performance of your obligations is hindered by the coronavirus outbreak – whether that’s because your suppliers won’t deliver, your staff cannot work in compliance with the social distancing restrictions or because too many of your workforce are off sick. The provisions may also require you to minimise the consequences of a ‘force majeure’ event – as an example, this may mean sourcing stock from elsewhere, or adapting your working practices so that some of your staff can still work.
What do I need to do?
In order to rely on the ‘force majeure’ provisions in your contract, having established that they may be able to help you, you should also then check how you go about acting on this. It is often the case that you will need to give notice to the other party to the contract notifying them that you consider that an event of ‘force majeure’ has occurred. This is particularly the case where the provisions operate to extend the time period for performance of your obligations, as your notice to the other party may start the clock running on that extension of time. It will be important for both parties to establish when the extension started and any clause in the contract requiring notice to be given, would be construed strictly and therefore we recommend that you seek legal advice before serving any such notice.
You may then also be required to keep the other party up to date throughout the period that the event of ‘force majeure’ is continuing, particularly if the circumstances change. In the case of the coronavirus pandemic, this may mean updating the other party as to the impact on your ability to perform under the contract in respect of any relaxation in the lockdown or social distancing rules – e.g. does a relaxation mean you will be able to resume performance of the contract more quickly, or are there still reasons why you would not be able to do so?
Types of contract
As mentioned above, the concept of ‘force majeure’ is relevant to a range of commercial and property contracts.
You should also be aware that if in a business-to-business contract, one party has agreed to comply with the other party’s standard terms, and those standard terms include ‘force majeure’ provisions, this may be challengeable as an unfair contract term under the Unfair Contract Terms Act 1977. This is a separate issue, and we can advise you specifically in relation to this, should it be relevant to your individual circumstances. This does not apply in relation to consumer contracts, which are governed by other legislation.
If there is no ‘force majeure’ clause in your contract, another alternative solution for you, if you are concerned you will not be able to meet your contractual obligations may be to argue that as a result of Covid-19, your contract has been ‘frustrated’.
‘Frustration’ is a rarely used legal doctrine which, if proven, would result in the relevant contract being brought to an end immediately, with all parties then being released from any outstanding obligations.
This is a crucial difference between ‘frustration’ and ‘force majeure’ as you must think carefully about whether you do want your contract to come to an end entirely – this is automatic if you successfully argue ‘frustration’ but may not be, depending on the contractual provisions, in respect of ‘force majeure’.
Do you really want to end your contract?
You may not wish to terminate the contract where the contract defines a long-term relationship between the parties with long-running obligations, many aspects of which will not be rendered ‘frustrated’ by the temporary effects of the coronavirus crisis. Likewise, should you wrongly assert frustration, this may constitute a breach of contract (because you have wrongly treated the contract as terminated) and therefore result in a claim against you by your opposing party for damages in respect of any losses they suffer.
Has the contract been frustrated?
The threshold for proving ‘frustration’ is very high, so it is difficult to argue successfully and few parties have managed to do so. It would normally therefore only be considered where there were no ‘force majeure’ provisions to rely upon. That said, if you had a limited ‘force majeure’ clause in your contract, which did not provide for pandemics, you may still be able to invoke the doctrine of ‘frustration’. It is possible that we’ll see a rise in these types of arguments being put, in light of the unprecedented circumstances we find ourselves in as a result of coronavirus.
‘Frustration’ occurs when, after a contract is entered into, it becomes physically or commercially impossible or illegal to perform because the obligations contained in it are transformed into something profoundly different by an unforeseen event, which is not caused by any party to the contract. All of the factors surrounding the original contract would be considered in evaluating whether ‘frustration’ had occurred, including the context in which the contract was entered into, and the intention of the parties at the time.
Is it impossible to comply?
The question in the current context is whether the coronavirus outbreak makes performance of a contract impossible, or only more difficult. ‘Frustration’ would only be arguable in the event that performance was impossible, for example as a result in the change in the law introduced as a result of Covid-19 which prevents non-essential travel and social gatherings. As time goes on, it is possible more contracts may become frustrated as a result of the restrictions.
Do a deal and preserve goodwill
There are inherent risks in any litigation, and therefore in some cases, it may be worth discussing any issues with the other party or parties to your contract, to come to an informal agreement, before seeking to take legal action under a contract. This is particularly the case where you have long standing relationships with the parties you have contracts with and you want to preserve the goodwill in those relationships, and save time and costs on taking legal action.
If you are the party at risk of defaulting, it may be helpful to make a proposal, and to be honest with your counterparties about the issues you are facing, when you expect to be in a position to perform, and sometimes also to give limited financial information about the stability of your business.
If you are an ‘innocent’ party whose supplier or other contractor is not performing or may not be able to continue perform their contractual obligations, you may consider that commercially, coming to an amicable agreement may be the best solution in order to preserve the goodwill in your business relationship with them, rather than seeking a legal or financial remedy. Additionally, it’s worth considering whether taking legal action to enforce strict adherence with a contract may damage the financial standing of the counterparty. If taking such action would put them out of business, is that a step you want to take?
Should you wish to do an informal deal with another party, and for example, temporarily agree a suspension or restructuring of payments or allow one or both parties some extra time for performance of certain obligations, it is still recommended that you look at the provisions of contract first, in order that you can evaluate the strength of your position in case it is not possible to come to an agreement.
I’ve made a deal, now what?
Additionally, we would also strongly recommend that you do still seek legal advice in connection with documenting any variation in writing. It will need to be made clear in any document setting out the terms of any waiver, suspension or variation, whether the effect of the changes to your contract will extinguish either party’s rights to claim a breach of contract in future or whether in future, either party may still sue the other for breach.
If you think you may default on your contractual obligations, or another party you are in a contract with may not be able to perform on delivering its goods or services to you:-
- Check your contract for ‘force majeure’ provisions or any other clauses which may exempt either party from performance as a result of unforeseen circumstances.
- If there are ‘force majeure’ provisions, consider whether the coronavirus pandemic is an event of ‘force majeure’ according to the drafting in the contract, and if so, what the effect of this is.
- Assuming there are ‘force majeure’ provisions which could assist, consider the consequences of using the provisions, and how to comply with any requirements to service notice.
- If there are no ‘force majeure’ provisions, consider whether the contract could be considered ‘frustrated’.
- If you consider your contract may be ‘frustrated’, think carefully about whether you wish to assert this, accepting the risk that you may be considered to have wrongfully terminated the contract if you are unsuccessful, and that the contract will terminate in full, if you are successful.
- Generally, consider, alongside the other remedies, whether it may be more prudent from a commercial perspective to seek to come to a mutual agreement with any of the parties with whom you are in contract.
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