Contracts and Covid-19: What does it mean? Are contracts still binding under lockdown ?
The ongoing epidemic has posed significant risks to businesses with disruptions in supply chains, cancellations of events and the closure of many services, but what does this mean for contracts that are in place? Is there a “get out of jail free card” to avoid obligations?
Under English law contracts are, in principle, absolute. In general terms, any failure to perform an obligation under a contract will leave a business potentially liable to a claim for breach of contract so it is important at this time to review contracts that are in place, especially those which seem likely to not be fulfilled during this time.
If you are considering avenues for recovery against a breaching party, looking to excuse your own business for contractual performance, or find yourself defending against a breach of contract claim due to a Coronavirus-related cancellation or delay, there are two issues to be considered which may be relied on if required and any contracts cannot be fulfilled. These are:
- Force Majeure clauses (also knowns as “Events Outside of Reasonable Control”; and
If you think you will not be able to perform a contract, and are worried about a potential claim for a breach against you, then you should be asking the following questions:
- Is there a force majeure clause in the contract?
- If there is, does it specifically list ‘epidemic’ as a force majeure event?
- If an epidemic is not specifically listed, could it be covered by the general wording of the force majeure clause?
- Has the epidemic actually prevented the contractual compliance or has it just made it more expensive?
- Have all reasonable steps been taken to avoid the effects of the epidemic on the contract performance?
- What does the contract say happens in the event of a force majeure event – does it terminate the contract completely or does it allow for a longer time period to comply with the contractual obligations (i.e. is the contract just suspended)?
- Is notice required to be served within a particular timescale to enable one of the parties to the contract to rely on a force majeure clause?
Similarly, if you find yourself in a contract with a party which is unable to perform its obligations (or is claiming this to be the case), now is the time to review the contract to see if you can make a claim for their potential breaches.
What if there is no force majeure clause?
If there is no force majeure clause in your contract (or indeed no written contract at all), then businesses who cannot perform their obligations will have to rely on the doctrine of “frustration”. This means that one of the parties to the contract is released from its contractual obligations if a change in circumstances makes it physically or commercially impossible to comply.
Whether a business can successfully rely on a force majeure clause, or rely on frustration, will be different from contract to contract and industry to industry.
If you are concerned about not being able to fulfil your contracts or looking into whether others have breached terms of their contracts with you, we can help clear things up for you. If you have any questions about where you stand, get in touch.