Travel restrictions, event cancellations, and sick and self-isolating workforces due to the impact of COVID-19 are causing difficulties for businesses across the globe and in the UK, many of which are now unable to perform contracts in the manner agreed with their contractual counterparties.
What recourse may you have if your contracts are affected?
Force majeure clause
The first consideration is whether the contract contains a force majeure clause. This is a clause which relieves parties from the consequences of non-performance in the event of circumstances beyond their control, often so-called ‘emergency’ circumstances, typically by allowing parties to suspend performance or terminate the contract.
Typically a force majeure clause applies in cases of natural disaster, epidemic, civil war, terrorist attacks, changes in the law or other government action, and similar designated circumstances.
In the case of coronavirus, it will be particularly significant to establish where and when the virus first constituted an epidemic.
Principle of frustration
Where there is no force majeure clause, contracting parties may be able to argue that the impact of COVID-19 has “frustrated” the contract.
The principle of frustration in English law does not depend directly on the drafting of the contract, and applies when an unforeseen event renders the performance of a contract physically impossible, or transforms the obligation to perform into something radically different.
For example, it is largely impossible at the current time to travel around Italy, due to the lockdown imposed by its government. This could physically prevent performance of many contracts.
If a contract has been frustrated, it is automatically discharged and the parties are released from any future obligations, and thus would not have to pay damages for non-performance. However, if the parties have made express provision in a contract for a particular event (for example, if they have allowed for it in a force majeure clause), the relevant contract will not be frustrated.
How to prepare?
If you anticipate an impact on your business or your counterparty, you should ensure all parties understand their contractual position as early as possible in order to take appropriate legal steps.
As the affected party, appropriate steps may include documenting the force majeure event and notifying and/or entering negotiations with a counterparty. As the non-affected party, re-negotiations may also be advisable, but ultimately legal action against a non-performing counterparty may be required.
Finally, monitoring will be of utmost importance for all businesses and investors in the coming weeks and months. The progression of the virus is difficult to accurately predict. As such, it is imperative that the legal position is understood and clearly mapped out without delay.
Book a call with our legal team and get legal advice now.