Legal News | 2.04.20
What does Covid-19 mean for your contractual obligations?
The common law doctrine of frustration is a way of identifying circumstances which are so serious and unforeseen that the law cannot expect the parties to continue their contract. It allows for the immediate termination of a contract and releases the parties from their obligations. It does not treat the contract as having never existed (i.e. void), but instead discharges the parties’ obligations from the point of termination onwards. If goods or services have been provided under the contract, they will not have to be returned unless there has been a failure to pay consideration.
What are the general principles for frustration?
- something has occurred after the formation of the contract which renders it physically or commercially impossible to fulfil (i.e. some exceptional supervening event);
- the contract does not include a clause for the event itself which has occurred (e.g. a force majeure clause);
- the event that the parties are seeking to rely upon must not be due to an act of the parties;
- the event must be so significant that performance of the contract would require of the parties something radically different from that contemplated at formation of the contract;
- the event must take place without blame or fault on the side of the party seeking to rely upon it;
- frustration brings the contract to an end immediately (i.e. automatically); and
- frustration operates to discharge the parties from further liability under the contract.
What must be taken into account when determining if a frustration event has occurred?
- the express terms of the contract;
- the context of the contract;
- the parties’ knowledge, expectations, assumptions and contemplations; and
- if the event was foreseeable, the parties’ calculations as to the possibility of the future performance of the contract.
What if there is merely a delay in performance, does this give rise to frustration?
The answer to this question very much relies on the context and therefore can only be answered on a case-by-case basis. An informed decision will need to be made based on the evidence of what has occurred and what is likely to occur after the event. It is often a question of degree. Delay must be abnormal and fall outside what the parties could have reasonably contemplated.
Can a contract be partially-frustrated?
An event may occur where only part performance of the contract is possible or a party may be temporarily unable to perform its obligations under the contract. The effect is only to excuse failure to perform in part and the remainder of the contract remains in force.
An example may be a contractual obligation to supply 60 bags of grain, but the yield only produced 25 bags of grain. This was through no fault of the party supplying the grain. The supplier will be obliged to deliver the 25 bags of grain, but may be excused from delivering the remaining 35 bags of grain.
Application of Frustration to Covid-19
Whether Covid-19 is an unforeseen event is time sensitive. Covid-19 may not have been in the parties’ contemplation at the time of entering into a contract last year. However, there is an argument that the warning of a global pandemic has been made for some time. Entering into a contract after Covid-19 became public knowledge makes it is difficult to argue that Covid-19 is an unforeseen event.
Italy and Spain, it is arguable that restricting travel, social distancing and restricting working arrangements was a foreseeable event from January 2020 onwards.
A frustration event is a definitive event. If the parties take the view that performance obligations can be delayed or extended, it is arguable that a frustration event has not occurred. This is because the event cannot be said to be an exceptional supervening event that renders it unjust to require the performance of the contract, as the parties have agreed to continue performance at a later date.
A force majeure clause is a contractual clause which excuses a party from performance following the occurrence of certain events. The burden of proving that performance is excused rests upon the party seeking to rely on the clause. As there is no standard force majeure clause that is required to be used in a contract, we need to look to the drafting of the clause in each commercial contract to understand its effect. Some clauses will suspend performance for the duration of the force majeure event or for a set time period. Where suspension is for a set time period, the contract may also include additional drafting to allow the parties (or one of them) to terminate it thereafter.
The force majeure clause may be drafted differently in each contract you have entered into; it is often drafted widely and includes a ‘catch all clause’ that refers to any event outside the reasonable control of the parties (or either of them).
An effective force majeure clause does not require the event to be unforeseeable. Where parties include a list of possible events within the drafting, this does show contemplation had been given to such an event occurring and therefore its foreseeability.
Whether you may rely upon a force majeure clause will very much depend on the way it has been drafted, such as whether it includes the words ‘prevent’, ‘hinder’, ‘delay’, ‘caused the party not to perform’ and ‘beyond the control’. Let’s consider these words in a little more detail:
- the event must ‘prevent’ performance. The party looking to rely upon the clause must prove that performance has become impossible – the performance being more expensive or difficult will not suffice
- the event must ‘hinder’ or ‘delay’ performance – the party looking to rely upon the clause must prove that performance will be delayed, but not impossible.
- the event ‘caused’ non-performance – the event must be the only effective cause of non-performance.
- the event is ‘beyond the control’ of the invoking party – to illustrate an event is beyond the control of the invoking party, the party must have taken reasonable steps to avoid the operation of the event or have taken steps mitigate its effects.
Application of Force majeure clauses to Covid-19
Whether Covid-19 falls within the scope of a force majeure clause will depend on the drafting. For instance some clauses may include a list of events which are beyond the parties’ control which include disease, pandemic, epidemic and quarantine as a triggering event. Depending on the drafting of the clause the relying party may have to demonstrate that the event is beyond its control.
If Covid-19 is not the reason that the party cannot perform its obligations under the contract (i.e. without the existence of Covid-19 they would still not be able to perform their obligations under the contract), they will be unable to rely on the force majeure clause to be excused for non-performance on the grounds of Covid-19 alone (although there may be other, related circumstances that will allow a party to rely on a force majeure clause).
Parties should note the obligation to take reasonable steps to avoid a force majeure circumstance and mitigate its effects. Mitigation may take many forms, including seeking financial help and utilising the government funding which is now being provided.
Businesses should keep up to date with the most recent news and advice the government is giving surrounding the Covid-19 and be mindful of what practical measures need to be put in place to protect their business. As highlighted above, the drafting in a contract can vary significantly. Therefore, if you have any questions on a specific contract, we advise you to seek independent legal advice.
Wansbroughs is able to review any contracts and documentation you currently have and provide you with some useful advice on any of the issues discussed in this article. Please get in contact with us on 01380 733300 or email us at email@example.com if you would like our assistance.
Last updated 02/04/2020