Alison Bradley considers the contractual and legal implications for businesses under UK law.
As the world grapples with the coronavirus and we wonder what the future will hold, it has had a considerable and immediate impact on many businesses and for some the future looks uncertain.
COVID-19 will lead to a wave of disputes in relation to contracts and who bears the risk for non-performance. It is important to take stock early and consider your position.
Many businesses will be wondering whether they can get out of certain agreements, or ensure agreements are complied with and in some cases, whether their obligations can be renegotiated. The fundamental principle in English law is that ongoing performance of a contract is absolute, so many people may simply find themselves in breach of contract, but there are some exceptions:
If there is no Force Majeure clause, the contract may be frustrated. If there is, consider invoking this clause. Force Majeure is a contractual right and is a ‘shield’ against breach; it suspends rather than terminates the contract. Force Majeure can only be invoked in certain situations. Consider the following:
- Is there a Force Majeure event? This must be an event which was unforeseeable, unavoidable and insurmountable. It must be beyond the parties’ reasonable control;
- Does the Force Majeure clause cover this event? This depends on how the clause is drafted, which must be scrutinised;
- Is the Force Majeure event the sole cause of the inability to perform the contract? If there is a contributory cause, then it may be found that Force Majeure was not the cause.
- A party is under a duty to do what they can to meet their contractual obligations and mitigate (the test as to what is adequate, varies). If no or insufficient mitigation has taken place, invoking the clause may fail; and
- Has proper notice been given? The Force Majeure clause must be invoked with a valid notice, which must be served correctly.
In March 2020, the UK Government issued regulations imposing restrictions on businesses and travel. Depending on the circumstances of each case, the Force Majeure event may be the regulations themselves, or may be caused by the regulations. Alternatively, the cause may be more practical, such as the inability of staff to work due to contracting COVID-19.
Inevitably, without prejudice negotiations could lead to a renegotiated contract which works for both parties and if not, the contract could be terminated.
If there is no contractual right to rely on, then the common law doctrine of frustration may help.
A contract is frustrated when it is ‘impossible’ for the ‘purpose’ (that is the ‘common purpose’) of the contract to be achieved. It has to impact both parties. If the risk that caused this is foreseeable, then the contract is not frustrated. Frustration discharges the contract, so all current and prospective rights and obligations are cancelled. Frustration has historically been difficult to establish, but the new wave of cases that will follow Covid-19 may see the courts adopt a developed view.
This article covers only a few brief contractual and legal principles. Each situation depends both on the wording of any contract and on the particular circumstances of each case. Clients should seek advice as soon as possible in order to clarify their options. Ultimately, parties that find themselves in peril should take a pragmatic approach and seek to address the issues on a without prejudice basis to see if terms can be renegotiated. It is imperative, however, that before doing so, legal advice is sought. If you have any questions, please speak to Alison Bradley.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.