Contracts and Covid-19 – Force Majeure or Frustration explained.
6th April 2020 by Robin Watson
Covid-19 has had a profound effect on all of our personal and business lives, and we are likely to feel the ramifications for some time into the future. If you have any pre-existing contracts or agreements already in place that have been impacted by the pandemic, and are concerned about where you now stand with them, how the relationship moves forward or if anything needs to be done to minimise any adverse future consequences, Laceys dedicated lawyers can help you through the challenges that lie ahead.
Please find below some advice on contracts and Covid-19, however with events unfolding and changing on a daily basis we would highly recommend you contact us to talk through your query so we can provide the most up to date information.
As with all agreements, the starting point is to review the contract in question to establish whether the issue at hand is dealt with in the contract itself. The disruption caused by Covid-19 is most likely to be covered by a “Force Majeure” clause.
Parties to a contract are bound by its terms and are expected to perform their respective sides of the bargain. If one party fails to perform its obligations, it is likely to be liable to the other party for a breach of the contract.
Some contracts contain Force Majeure clauses, which are a mechanism to excuse one or both parties performance of their contractual obligations in the event that certain specified events which are beyond the control of the parties prevent the contract from being performed.
All Force Majeure clauses are different and therefore need to be examined to determine whether the Covid-19 pandemic is covered in your contract. Given the recent and rapid on-set of the virus this is unlikely so;
- Is a global pandemic something that could be included in any broader definitions in the contract?
- Can you establish a link between Covid-19 and the inability to perform the contract?
- Is it possible to perform the substantial terms of the contract in a different way?
If a Force Majeure event can be established then it is likely that performance of the contract will be excused, or delayed. This however will likely be dependent on the terms of the contract as a whole, and it is therefore important to consider the situation globally, and not just the Force Majeure provisions.
Many contracts are not in writing or simply do not contain Force Majeure provisions, so what happens then? In these circumstances the doctrine of Frustration may apply.
This means that a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
Discharge of contract denotes the contract is terminated, as if it never existed, although a person who has performed part of the contract prior to the frustrating event is entitled to be paid for that element of the contract.
It seems likely that the sweeping changes and restrictions on movement we are currently experiencing are likely to render the performance of many contracts impossible, and therefore possibly frustrated. The interpretation will be very much dependent on the facts and nature of each contract, and must be considered carefully.
Finally, you should also review any insurance you may have which covers any disruption which you are experiencing. We are happy to review any policy queries which you may have, or alternatively your insurance broker will be able to assist.
If you need any further advice on contracts and Covid-19 then please contact our team today and we will be happy to help.