Andrew Ryan – Partner and Head of Dispute Resolution at Davis Blank Furniss – on coronavirus and its impact on your contractual obligations
In light of the current pandemic, many businesses will have concerns regarding whether they will be able to continue to perform their contractual obligations and the extent of their liability in the event that they are unable to do so.
In many commercial contracts, there will be a ‘force majeure’ clause. A force majeure clause excuses one or both parties from performing their contractual obligations in the event of a specific event which is beyond the parties’ control. A force majeure clause may depending on its wording:
• Entitle one or both of the parties to terminate the contract;~
• Excuse a party from performing their obligations under a contract in whole or in part; or
• Entitle a party to suspend performance or to claim an extension of time for performance.
Not all force majeure clauses are the same and they may have been subject to negotiation between the parties before entering into the contract. Force majeure clauses often make express provision for (amongst other things) natural disasters, war, terrorist activities and government sanctions.
With specific relevance to coronavirus:
• Prior to February 2020 some force majeure clauses may expressly cover the outbreak of an epidemic or pandemic. After February 2020, some force majeure clauses may expressly name COVID-19 or coronavirus.
• Some force majeure clauses may reference a governmental intervention which prevents the performance of the contract.
The force majeure clause may also require consideration of such matters as to (1) whether the contract excludes events which could reasonably have been provided against or avoided; (2) whether the event must have made performance of the contract impossible (rather than, say, more expensive to perform); (3) whether it requires (reasonable) steps to be taken to mitigate the consequences of the event; and (4) whether prompt notification of an event is required.
Please note that the term ‘force majeure’ may not be used in the contract. Different contracts have different names for force majeure clauses, and it may be the case that it comes under a different name or heading.
It is also possible that a contract may be ‘frustrated’ as a result of the outbreak of coronavirus.
A contract may be frustrated when there is a supervening event (without default of either party and where the contract makes no provision for such event) which:
• Renders it impossible to perform the obligations under the contract; or
• Significantly changes the nature of the outstanding contractual rights/obligations (i.e. transforms them into something ‘radically different’ from what was intended) so that it would be unjust to require the parties to carry out the contractual obligations in light of the new circumstances.
Recognised frustrated events include (but are not limited to):
• A change in the law;
• Wars which render performance of the contractual obligations illegal;
• Cancellation of an expected event;
• Abnormal delay which could not have been anticipated by the parties;
• Death; and
• Illness or incapacity (where personal service is required).
By way of an example, if the contract requires performance at a specific time in a specific place and the outbreak of the coronavirus makes this impossible, then the contract may be frustrated.
If a contract is frustrated, then it is ended and both parties are released from carrying out their obligations under the contract. If one party has already received monies under the contract, it may be required to repay the same to the paying party.
Frustration can only occur when there is an unexpected supervening event. So, for example, if the contract was entered into in, say, February 2020, it may be necessary to consider if the spread of the coronavirus was an event which could have been contemplated by the parties.
If the contract includes a force majeure clause which is deemed to cover the relevant event, then the event cannot have been unexpected because the parties have made express provision for it in the contract.
However, it is important to note that each matter depends on its own specific facts and circumstances. Advice should always be sought.