Northampton, 2020-06-01

At some point companies will be required to consider whether they, or a party with whom they have contracted, can suspend or terminate a business contract as a consequence of the disruption caused by COVID-19.

Government restrictions, unsettled markets and labour issues continue to create obstacles to doing business, in some cases making adherence to contractual obligations impossible. For those agreements between international parties governed by English law, determining whether an agreement can be suspended or terminated is not necessarily straightforward because no general relief or allowance for COVID-19 exists. Each case depends on the specific terms of the contract and the exact circumstances in which the parties find themselves.

Here are some of the key issues that parties to contracts governed by English law should consider:

1. Force Majeure – does the contract include a force majeure provision that deals with the specific circumstances?
2. Mitigation – has the affected party mitigated its loss?
3. Frustration – has there been frustration of the contract?

What is Force Majeure?

A force majeure clause (if included within the contract) commonly sets out the rights and remedies of one or both the parties if an extreme event occurs which is outside their control.

A contract must specifically provide for force majeure as there is no common law principle for force majeure in England.

As each contract is drafted differently, it is important to review the specific wording on a case by case basis.  Depending on the wording of the clause, a party may be able to rely on the clause to justify delay, suspension or even termination of the contract without any liability.

Does COVID-19 Constitute a Force Majeure Event?

Whether COVID-19 constitutes a force majeure event will depend upon the definition of “force majeure” in the contract as well as the specific circumstances.

Wording that includes “pandemic” or “health crisis” may support COVID-19 being considered a force majeure event.  Any mandatory restrictions imposed by the Government may be considered a force majeure event if the definition includes wording such as “acts of government” and “regulatory measures”. On the other hand, reference to an ‘Act of God’ is unlikely to include COVID-19 as this usually refers natural disasters such as floods and earthquakes.

Unless the contract specifically states otherwise, force majeure generally won’t apply if the event was ongoing or in the contemplation of the parties when the contract was entered into.  The point at which COVID-19 was “in the contemplation of the parties” is open for interpretation.

It will be for the party seeking to enforce the force majeure clause to prove that the force majeure event has occurred to the extent that performance is significantly delayed or altered.

Mitigation

Where a force majeure event has been established, it is still necessary for the disadvantaged party to show that it has mitigated the effects of the force majeure event, regardless of whether this is specifically provided for in the contract.  The purpose of the force majeure clause is to provide relief for the inability to perform obligations under the contract, not to terminate or suspend the contract where the contract becomes more onerous for the other party.

Frustration

Separate and different to force majeure, frustration does not need to be provided for in the contract, it is a common law right.  A contract may be frustrated if an event occurs, through no fault of either party, which makes performance of the contract impossible or fundamentally different.  A contract will not be frustrated if the contract just becomes more difficult or expensive for one party to perform. In practice frustration is rarely established as it is difficult to prove that a contract was impossible to perform. However, frustration may be increasingly relied upon, given the current economic conditions, as a means of delaying or confusing matters.

Where a contract is frustrated, that contract is terminated and the parties will be discharged from their future obligations. If the contract is long-term in nature then the implications of termination should be considered before claiming that the contract is frustrated. Importantly, frustration won’t discharge the parties from previous obligations that accrued.

A potential example of frustration would be where a location is shut down as a consequence of government restrictions in connection with COVID-19 and this stops a time critical event, which is the subject of the contract, being held.  In such circumstances it might be reasonable to argue that the parties could not perform the contract.

Conclusion

Whether force majeure applies will depend on the individual contract and the circumstances in which the parties find themselves.  It is important that contracting parties seek legal advice on the specific terms of their contract.  If a party wrongly refuses to perform its contractual obligations or incorrectly terminates the contract, then the other side may take advantage of this and seek damages for breach or wrongful termination.

Rather than invoking a force majeure, businesses may wish to discuss options with the other party to reach an amicable solution.  It is possible that both parties are in a similar position e.g. if the contract is for the supply of goods, the other party may no longer require the goods. Maintaining good business relationships during the current pandemic may yield benefits when some form of normality eventually returns.

Author: Craig Harrison, Attorney at law

Tollers LLP