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Commercial & Corporate

Coronavirus – Frustration and Force Majeure in Commercial Contracts

In the wake of the COVID-19 outbreak, many businesses may be struggling to meet their obligations under commercial contracts. Alternatively, they may be suffering loss as a result of suppliers being unable to fulfil their contractual obligations. This briefing explains how businesses can navigate the difficulties associated with the outbreak where contracts are governed by English law.

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The below practical steps, explained in more detail below, should be taken by businesses in these unprecedented times:

  1. Review the terms of any applicable force majeure (or hardship) clauses in commercial contracts closely and consider whether they apply to the ongoing pandemic.
  2. If it is impossible to perform the contract as originally anticipated and there is no force majeure clause covering COVID-19, consider whether ‘Frustration’ applies (it is a legal doctrine as we explain in this note).
  3. Going forward, include specific wording in all future contracts (including standard terms and conditions) to cover disruptions caused by the pandemic and ensure that contracts detail how these clauses will work.

Force Majeure

A force majeure (or hardship) clause is often included in commercial contracts to specify supervening events that would relieve the parties of certain or all obligations under the contract. The specified events are often negotiated by the parties and may in well drafted clauses include events such as a “disease” or “epidemic” or “pandemic”.

Where a force majeure clause covers the outbreak of COVID-19, the parties should check what obligations this relieves them from (as it may only relieve the parties of certain obligations), and comply with any notice requirements under the clause. If the clause includes a duty for the parties to mitigate their losses, businesses should take steps to do this and keep a record of any steps taken. Where the force majeure clause contains a cancellation right, businesses should also prepare themselves for the eventuality that contracts are unilaterally cancelled.

In enforcing a force majeure clause, the burden of proof is on the party seeking to rely on the clause. They must show that  the factual circumstances apply to the wording of the clause (on the balance of probabilities; ie they do more than they don’t).

Where the clause does not specify that “disease” or “epidemic” is a force majeure event, another specified event could cover the fallout from the outbreak, such as an “economic downturn”, “act of God” or “outside the reasonable control of the affected party”. However, these terms are open to interpretation and will require further consideration in the context of the clause as a whole.

As each clause in any given contract will be different, it is impossible to provide specific advice in this briefing. However, it is imperative that parties clearly understand their rights and obligations under a commercial contract in the current climate. If you are unsure whether the force majeure clause in any of your contracts applies to COVID-19, please get in touch.

Frustration

If a commercial contract does not contain a force majeure clause, or COVID-19 is not covered by such a clause, the legal doctrine of frustration may apply.

Frustration is different to force majeure as it is a legal doctrine applied by the Courts, as opposed to a freely negotiated contract clause. Its purpose is to relieve the parties of their obligations under a contract where a supervening event (which is not the fault of either party) has made performance of the contract radically different from what was originally agreed between the parties.

Frustration can only apply to an event that occurs after a contract has been concluded. It will therefore not apply to any contracts agreed after the outbreak of COVID-19.

The doctrine is very narrowly applied by the Courts and a contract will not be deemed to be frustrated on the basis that it is more expensive or difficult to perform or because another supplier has failed to perform its own obligations. In these circumstances, a business would be expected to make alternative arrangements.

Where a contract is deemed to have been frustrated, the parties are freed from further performance of the contract and are not liable for damages or non-performance of the contract without having to take any further action. This is great news for those who can’t perform their part of the contract; not so for the party depending on its performance.

Unless otherwise agreed by the parties, monies paid under the contract before it was discharged (excluding certain expenses as determined by the court) can be recovered. Temporary frustration is not possible so, if a contract has been frustrated, this will be permanent.

The law of frustration is complex and only applied in very specific situations. Please contact us if you would like further advice on whether frustration may apply to your current circumstances.

Insurance

Many commercial contracts contain protection from business interruption. If COVID 19 affects your contractual relationships you may have a claim. You will have to establish that you have a viable claim under the terms of your policy, and even if you have that cover, you will have to prove the losses that you incur so that you will only obtain the cash after the event from the insurer, so it is not a resource of immediate protection but may help you down the line.

New contracts under English Law

Going forward, businesses should ensure that all future contracts (including their general terms and conditions) expressly deal with the impacts of COVID-19. It may not be sufficient to specify a “pandemic” or “disease” as an event in future force majeure clauses, particularly where the clause is worded to only apply to unforeseen events (as the outbreak is now well publicised around the world).

Businesses should also consider practical consequences of the impact of COVID-19, such as causation requirements, how the parties are to bear the cost consequences of the pandemic, the notice requirements and the extent of duties to mitigate.

Parties should also take into consideration how future changes in the law resulting from COVID-19 may affect performance of the contract and how the parties will deal with such events.

This is a complex area of law. If you are affected, the sooner you seek advice the more we can do for you. We are here to help.

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Jeff Roberts

Partner - Head of Commercial Services

jeff.roberts@collyerbristow.com