Covid 19 – terminating or delaying performance of contracts
The coronavirus pandemic has affected many contractual arrangements, from hospitality and tourism, to a variety of other global supply chains. Parties have therefore been exploring ways they might be able to either terminate their arrangements or delay performance. Two key areas of focus have been force majeure clauses and the doctrine of frustration.
Under English law, a party will only be able to rely on a force majeure clause if there is one in the contract.
Relying on force majeure clauses to terminate contracts or delay performance is not easy. Much will depend on what the clause actually says and courts tend to take a strict approach to interpreting these clauses.
First to consider, is whether Covid-19 is actually within the scope of the definition of “force majeure”. Use of words like “disease”, or “epidemic” within the definition are likely to cover Covid-19. Use of the terms “act of God” or “events beyond a party’s reasonable control” may also suffice. However, the exact words and whether lists of included events are to be interpreted as exhaustive or non-exhaustive must be carefully considered in each case.
Second, has the force majeure event actually hindered or delayed performance of the contract? The argument that Covid-19 has made performance more expensive or difficult will not be enough. A party wanting to rely on force majeure will have to show how exactly it has affected performance. It may only be certain aspects of performance that have been affected, so there is still an obligation to perform unaffected parts; and
Third, has the party relying on the event taken reasonable steps to avoid or mitigate the consequences? Many force majeure clauses require the parties relying on them to mitigate the impact of the event. Generally, English Law implies a duty on the party relying on force majeure to mitigate the loss.
Further, there may also be provisions in the force majeure clause which prevent a party relying on it where there has been a failure to carry out certain other obligations, such as disaster recovery and business continuity.
Whilst the force majeure clause may allow a party to rely on it to delay performance, the right to terminate will depend on whether it further allows for termination resulting from force majeure. The parties will have to look closely at the provisions of the clause and ensure the correct notice is provided.
There is a real need for careful analysis of a force majeure clause before it can be relied on – a failure to do this could risk the party attempting to terminate, being found in breach of the contract and in turn liable to pay damages.
Without a force majeure clause, the only other route available to try to escape performance is to rely on the doctrine of frustration. Frustration allows a contract to end when an unforeseen event happens that makes performance of the contract impossible to fulfil. The contract is ‘frustrated’ and treated as discharged by automatic operation of law. This means there is no need to perform future obligations and so parties to a frustrated contract cannot claim damages from one another for non-performance.
But satisfying the test for frustration is not easy. A party will need to show:
The event causing frustration happened after the contract was formed;
The event is not the fault of either party;
The event is something beyond the contemplation of the parties at the time they entered the contract and the event is so fundamental it goes to the heart of the contract; and finally
The event makes performance of the contract impossible, illegal or fundamentally different from what the parties contemplated at the time they entered it.
In considering whether the criteria have been met, much will depend on the individual circumstances of the case and the background. Clearly, demonstrating something was not in the contemplation of the parties at the time they entered the contract is a key obstacle.
It will not be enough for the event to merely have made the contract more difficult or costly to perform or that it has delayed performance – the event must make performance impossible.
Therefore, a party will have to carefully consider the contract terms and the facts before proceeding with invoking frustration. A failure to do this properly, could result in the counterparty claiming it was wrongfully asserted, and that this amounts to a repudiatory breach of the contract.