The coronavirus has sent shockwaves around the business community, which has been left reeling from the introduction of a series of measures that will make it difficult for many enterprises to continue to operate. Supply chains have been disrupted, events have had to be cancelled and a growing number of businesses are being forced to close.
‘In an attempt to contain the fallout, many are now looking at their contracts to see if there is any way they can get out of agreements they can no longer perform or any route by which future obligations can be put on hold,’ says Barry Wood, commercial dispute resolution lawyer with Richard Reed Solicitors in Sunderland, who answers some of the questions being asked at the moment.
You should check the Government website for the latest guidance in conjunction with this article, as the guidelines on the coronavirus (COVID-19) are changing daily.
Q1: If I am unable to perform a contract due to the coronavirus, am I entitled to bring the agreement to an end in reliance on a force majeure clause?
Force majeure clauses are designed to provide relief from contractual obligations where an event occurs that is beyond your reasonable control and which renders you unable to do what it is you said you would do. However, not all force majeure clauses are worded in the same way, so it is important to check what the clause you are seeking to rely on says and whether, if a force majeure event is established, it gives you the right to bring the contract to an end, to suspend performance until the event has passed or to merely be excused from the non-compliance that has occurred.
Q2: When is a force majeure event likely to be deemed to have arisen?
When deciding whether a force majeure clause can be relied on, it is important to bear in mind that:
- while the outbreak of coronavirus is undoubtedly an event beyond anyone’s control, it is unlikely to be the virus itself that has made it impossible for you to meet your obligations – rather it will be the consequences of the virus, such as the need for social distancing or the mandatory closure of your business, and it will be this that is relevant when determining whether a force majeure event has occurred;
- you cannot rely on force majeure just because the fallout from the coronavirus means that it will be more difficult or expensive for you to do what you have promised to do – instead you will need to establish that the consequences of the virus make it impossible for the contract to be performed or else render it radically different from that envisaged; and
- you are only likely to be able to rely on force majeure provisions where the event that is causing you difficulties could not have reasonably been anticipated, which might be easy to show in respect of a contract entered into in December 2019 but much more difficult for a contract agreed in February or March of 2020.
Most force majeure clauses can also only usually be relied on where prompt notice of a force majeure event is given and all reasonable steps to mitigate the problems being experienced have been taken.
Q3: If I am unable to perform a contract due to the coronavirus, but have no force majeure clause in my agreement, can I rely on the law of frustration instead?
The law of frustration exists to give relief in cases where something happens after a contract has been formed and which:
- is fundamental to the deal that has been struck and was not contemplated by the parties at the time the agreement was reached;
- is not due to something either party has done, so is not anyone’s fault; and
- has resulted in performance of the contract being made impossible, illegal or radically different to that originally contemplated.
Where these criteria are met, it may be possible for you to lawfully terminate a contract and walk away with no further obligation. However, the bar for proving frustration is very high.
That said, there may be some instances where frustration might be arguable in coronavirus related contract disputes, including where event venues have had to cancel bookings to comply with tighter rules on social distancing, or where smaller companies which deliver personal services, such as mobile sports massage or beauty treatments, have seen their entire staff having to self-isolate due to a suspected case of the virus being reported.
Q4: What if I seek to bring a contract to an end on the basis of force majeure or frustration and it turns out, when all this is over, that I was not entitled to do this?
If you seek to bring an agreement to an end in circumstances where it turns out that you were not entitled to do so, then you will have committed what is known as ‘wrongful termination’ which will entitle the other party to claim compensation from you for the losses they have suffered. This is why you should take legal advice if you think force majeure or frustration may apply.
Q5: Am I better off trying to negotiate some sort of compromise?
Nobody yet knows how long the coronavirus pandemic will last, or how many weeks, months or even years it will continue to impact us. However, there is confidence that we will eventually get on top of things and that life will return to some sort of normality.
When this happens, it will be so much easier for everyone to get back on their feet if commercial relationships remain intact and if efforts can be focused on rebuilding businesses rather than pulling them apart through potentially time consuming and expensive litigation.
With that in mind, we would strongly encourage businesses to try to settle their disputes amicably and to involve lawyers at an early stage. A lawyer experienced in dealing with contract disputes in which force majeure or frustration arguments are deployed can assist in a number of ways, including:
- explaining the impact coronavirus has had on your business;
- outlining the steps you have taken to try to mitigate the situation;
- what you would like the other party to your contract to do to help alleviate the pressures you face; and
- making proposals for reaching a sensible compromise which will hopefully enable you both to weather the storm that the coronavirus has brought.
If you require help resolving a contract dispute arising out of the coronavirus, then please contact Barry Wood on 0191 567 0465 or email: [email protected]
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published on 1 April 2020.