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18th March 2020

COVID-19: Non-Performance or Delayed Performance of Contractual Obligations – what’s in the legal toolbox?

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Coronavirus (COVID-19) has now been declared a pandemic by the World Health Organisation, and as it sweeps across the world nearly all businesses will find themselves and their employees directly and seriously impacted. As well as being a health catastrophe, the virus is causing disruption to businesses due to workplaces closing, travel restrictions, and major events around the globe being postponed or cancelled. This is causing multiple issues in relationships between companies, mainly arising when one or even both parties are simply prevented by events outside their control from fulfilling their obligations.

What are the options when this happens to your business and the agreement in question is governed by English law? Fortunately, there are several contractual tools available.

- Terminating the Contract
- Exercising rights under a ‘Force Majeure’ clause
- Frustration

Terminating the Contract

You may decide that the best outcome for your business is to terminate the contract and end all future obligations. Before doing so, you should review the termination provisions within the contract and consider if and how they allow you to do so. By way of example, you may be able to terminate the contract because certain circumstances have arisen (such as the other party getting into specified financial difficulty) and/or simply by giving notice to the other party. It is always necessary to look carefully at the means for effecting valid termination, and at the commercial and contractual consequences, when deciding whether to terminate.

Exercising rights under a ‘Force Majeure’ clause
    Most commercial contracts contain a ‘force majeure’ clause.

    Typically, such a clause will define a ‘force majeure event’ as a circumstance or event outside of a party’s reasonable control, setting out examples. Some common examples of force majeure events included in contracts are natural catastrophes such as floods and earthquakes, as well as war, terrorism and pandemics. A force majeure clause will usually provide that should one of these defined events occur, or any other event which is outside of the party’s reasonable control, then that party will either be excused from, or entitled to suspend performance of, all or some of its contractual obligations.

    The Coronavirus outbreak is clearly the sort of event that force majeure clauses are intended to cover. However to obtain relief for any non-performance or delayed performance, you would need to prove that the outbreak, or some consequence of the outbreak, constituted such an event, and that it was or will be the cause of any non-performance or delayed performance. Normally you would also need to demonstrate that you had taken reasonable steps to mitigate the effect of the event, even if this may involve some additional costs.

    When a force majeure provision takes effect, the contractual obligations usually remain in place but are suspended while the force majeure event continues (unless the parties agree otherwise). Some force majeure provisions will allow parties to terminate the contract.

    It is always important to look carefully at the specific clause and the consequences of relying on it before doing so. In many cases it will be sensible to communicate early with the other party if it is intended to rely on a force majeure clause.

    Whether or not the contract contains a force majeure provision, English law entitles a party in some circumstances to be excused from its future contractual obligations on the basis of the doctrine of frustration.

    This doctrine entitles a party to an agreement to be excused because the purpose of the contract has been ‘frustrated’ by an event or circumstances occurring after the contract was entered into, without fault on either side. The event or circumstance must be so serious and fundamental that it strikes at the heart of the agreement and makes it commercially or physically impossible to perform. By way of example, contracts can be frustrated by reason of the destruction of premises or property, or by a subsequent change in the law which renders performance illegal.

    As laws are passed to contain the virus, imposing travel and flight restrictions, then these could constitute grounds to claim that a contract has been frustrated.

    The effect of frustration is that each party is excused from further performance of its obligations. It does not affect obligations already performed or which have fallen due for performance at the time of the frustrating event or allow for money paid to be reclaimed. However, under UK legislation money paid or payable at the time of frustration can be reclaimed, subject to the paying party being entitled to retain a sum to cover expenses incurred before frustration.

    Aside from these provisions and rules, there may be other parts of the contract in question which can be called in aid to find a way out of obligations. Any solution will depend on the specific terms of the contract and, perhaps more importantly, on the commercial situation.

    Business are likely to find themselves on both sides of the contractual fence as a result of this crisis and commercial flexibility and co-operation is likely to be more important than legal manoeuvring. It will however be important to know where you stand, and the options that are available.

    Before taking any action, you should at least consider:

    • Whether the contract contains a force majeure provision and that the Coronavirus outbreak is within its scope, and whether the contract contains any other relevant provisions (for example in relation to changes in laws);
    • Identify which obligations are not able to be performed and that it is as a result of the outbreak;
    • Review what steps can reasonably be taken to mitigate the effects of the outbreak and the ability to perform the contract, including complying with official guidance;
    • Consider the commercial and financial consequences of a claim for force majeure or frustration of the contract; and
    • Review insurances to assess whether any losses may be recoverable.

    For further advice contact one of our commercial litigation team.