TERMINATING CONTRACTS – THE EFFECT OF FORCE MAJEURE AND FRUSTRATION
Are you, or your business, party to a contract that is now difficult or impossible to perform because of the COVID-19 (Coronavirus) pandemic? Do you wonder where the law stands on these matters and what you should do?
This note examines what may happen when you cannot fulfil your contractual obligations because of the Coronavirus pandemic and practical steps to consider if difficulties arise.
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The Coronavirus pandemic is affecting our lives and the economy in many different ways. If it means you cannot honour any contracts to which you or your business is a party, then there are at least two places to look for relief from your contractual obligations:
- in the contract itself, for a so-called force majeure clause; and
- outside the contract, to the doctrine of frustration that judges have developed in determining previous cases in the Courts.
What is Force Majeure?
Force majeure is a French term that means, literally, greater force.
Conventionally, force majeure clauses list events or actions that, were they to occur after the contract is formed, would relieve you from your obligations under that contract. Generally, force majeure events or actions are totally out of the control of the parties to the contract, for example, war, natural disaster, industrial action, epidemic and pandemic.
You should re-read your contract to see whether it contains such a clause. If it does not, you cannot rely on force majeure and should consider the doctrine of frustration, explained in the next section. This is because force majeure is not a generally-applicable doctrine in English law; you would have had to agree it applied and determined its scope when you entered into the contract.
If your contract does contain a force majeure clause, you need to consider the clause to try to establish whether you could trigger the clause by reference to the Coronavirus pandemic.
The three stages of your considerations are as follows:
- Is the Coronavirus pandemic covered by the list of events in the clause?
- If the answer to stage 1 is yes, is your or the other party(ies)’s ability to perform its obligations under the contract prevented (or as otherwise impeded within the meaning of the words in the clause) by the Coronavirus pandemic?
- Have you or the affected party taken all reasonable steps to seek to avoid or mitigate the effects of the Coronavirus pandemic on the contract?
If the answer to all three stages is yes, then you may wish to trigger the clause.
Once triggered, whoever seeks to rely on it will only avoid their contractual obligations if the other parties to the contract do not challenge reliance on the clause by reference to the tests above, or statutory or other bars to doing so.
Usually, the clause will state the effect of it being triggered, and how far the parties are relieved of their obligations. Some clauses include provision whereby the contract terminates altogether if the force majeure event does not end after a certain time.
The Doctrine of Frustration
The English law doctrine of frustration operates a high threshold and therefore will only apply in limited circumstances.
Those circumstances are:
- the frustrating event is not the fault of either party;
- the frustrating event occurred after the formation of the contract and was not foreseen or could not have been foreseen by the parties; and
- it has become impossible for the parties to physically or commercially fulfil the contract or the contractual obligations are rendered entirely different as a result of the frustrating event.
The consequences of frustration are that the contract automatically comes to an end and the parties are no longer bound to perform their obligations.
It can sometimes be possible to recover money paid under a frustrated contract, if, for example, the Law Reform (Frustrated Contracts) Act 1943 applies.
Practical Tips: What should you do next?
As soon as you or your business detects a risk of not being able to perform a contract because of the Covid-19 pandemic, you should take steps including:
- Re-visit the contract and look for force majeure provisions, and consider whether they apply.
- Consider whether you need to give notice to rely on the clause and the consequences of triggering it. Depending on your position, consider the following:
If you want to rely on a force majeure provision:
- Collate evidence of the impact of the Coronavirus pandemic.
- Comply with any notice provisions in the force majeure clause and record in writing any steps taken to mitigate the impact on your contractual obligations.
- Consider the impact of triggering the clause.
If another party tells you they want to rely on a force majeure provision:
- For the party receiving the force majeure claim, they should carefully consider it.
- Is the event being relied upon consistent with the scope of the clause?
- Has any notice provision been complied with?
- How will you adapt if the contract is abandoned? Could a variation be appropriate?
- Consider issuing rolling or protective force majeure This is because COVID-19 has spread so extensively and thus these notices will take into account the developing nature and impact the virus has had on contractual obligations.
- Consider whether the contract could have been frustrated.
- Consider informal resolution of the issues arising by opening dialogue with the other parties to the contract as soon as possible:Consider the strict legal position first, and seek advice if necessary, so that you know what you will face if informal negotiations fail;Explain the situation and try to agree a way forward together in the circumstances – could obligations be re-scheduled or delayed, or even take a different formRecord any agreed way forward in a supplemental agreement or variation of the contract (you should consider whether the contract has a variation clause in this case and comply with the formalities of varying
it in accordance with that).
- Note the financial effect of a variation, suspension or termination of a contract.
- Review any insurance policies you may hold and familiarise yourself with the cover they provide. Be careful to ensure not to invalidate any cover terms through action or inaction.
Streathers Solicitors LLP
31 March 2020
To discuss how we can help you, please call our office on 020 7034 4200 and ask to speak to a member of the Dispute Resolution team.
*The Briefing Note reflects the position as at the date of publication. The information in this Briefing Note is not intended to amount to legal advice to any person on a specific matter or case. You are advised to obtain specific, personal advice from us about your case or matter and not rely on this Briefing Note.