Covid-19 – Contracts: where do you stand?

What is the position if you cannot fulfil your contractual obligations due to the Coronavirus?

Many of our clients at DRN have been in contact with us to ask this very question. As businesses are having to close or lay off staff, or put them on Furlough leave, it’s looking increasingly likely for contracts that were entered into before all this began to be fulfilled.

Generally speaking, failing to fulfil the terms of your contract would mean you were in breach of that contract. However, this is subject to two exceptions.

Firstly, you need to consider your contract to see if you have a force majeure provision that will cover this situation. In absence of a force majeure provision, you may be able to rely on the common law doctrine of frustration.

Contractual term – force majeure

Many written contracts contain a clause which outlines what will happen should an event outside the control of those contracted occur. This clause may excuse those involved from the responsibility of fulfilling their obligations, or will prevent them from being held liable should they fail to fulfil their obligations.

Such clauses will generally cover situations where it becomes impossible for those contracted to fulfil the contract, or the contract has been hindered or delayed in some way.

What is covered, however, depends on how the clause has been drafted. Whether or not an event has been included will be dependent upon the words used. As such, the force majeure clause needs to be carefully considered. Many will expressly refer to epidemic or pandemic if drafted on a long stop basis, which should cover the Coronavirus.

As an alternative, the clause may refer to illegality or government action which may cover the prohibitions imposed by the government on various businesses, or the imposed mandatory detainment under the Health Protection (Coronavirus) Regulations 2020.

It should be noted that changes in economic or market circumstances are not relevant events for the purpose of such clauses, and as such a party relying on a clause must be very clear about the reason for their failure to fulfil their obligations.

In the event that your obligations are covered under the contract, generally each party will bear their costs caused by the suspension or termination, unless the contract specifies otherwise.

If the event is temporary and the contract is capable of being fulfilled at a later date, the obligations can be resumed at the appropriate time. If there is an express provision to terminate, the contract will normally set out what happens to payments already made in the event of termination. If it is now impossible for the contract to be fulfilled, the paying party will be entitled to restitution under the Law Reform (Frustrated Contracts) Act 1943, as referred to below, in absence of an express term.

One issue may be non-refundable deposits. These will need to be looked at where appropriate in line with the Consumer Rights Act 2015. They may be retained, provided they are not unfair.

Finally, any contract dealing with the public will need to consider what was clearly pointed out when the contract was entered into given that many consumers will not know what force majeure means.

What if there is no clause or no written contract?

If there is no clause written into a contract, or no written contract at all, you will need to consider the doctrine of frustration.

This will not necessarily be a desirable route, as it is generally rarely permitted by the courts. That said, we are currently living in unprecedented times.

For this to arise, the event relied upon which frustrates the contract must be unforeseeable. As such, it is unlikely that this can be relied upon for contracts entered into once the Coronavirus began to obtain significant attention.

A high bar is required for frustration as you will need to show that steps could not be taken to prevent the contract failure.  Ultimately, the circumstances must make compliance impossible.

If frustration arises, the contract will be brought to an end automatically, and all parties are released from their obligations, except those obligations that should have been performed before the frustrating event. A party will remain liable for terms performed before the frustrating event.

Under the Law Reform Act 1943, a party who has paid money will be entitled to a reimbursement of those funds, minus an allowance for expenses that have been incurred in performing obligations prior to the frustration.

How can I agree an alternative?

Whilst the above sets out the current legal position, the option is always open for contracted parties to carry out negotiations in order to agree an alternative resolution. For this reason, remaining open to the prospect of communication and negotiation is advised.

If you have any concerns regarding contracts that you have entered into which are now affected due to the Coronavirus, please contact Alison Rowley at DRN on 01282 433241 or email ar@drnlaw.co.uk.