The effect Coronavirus is having on public health, business, financial markets, stocks and shares, international travel and sporting events is only too evident as the world comes to a standstill. For business owners forced or deciding to suspend or cancel operations as a result of this pandemic, there are very real challenges in managing contractual relationships and avoiding potentially ruinous claims.
In England and Wales, the default position is that contracts requiring ongoing performance are absolute, and therefore the suspension of operations leading to breaches of these contracts will leave businesses liable for the losses suffered by the other party as a result of a breach.
In many contracts, hidden amongst the unexciting “boiler plate” provisions will be a force majeure clause. This may offer a crumb of comfort as such clauses generally either provide for the suspension of performance or excuse one or both parties from performance of a contract following the occurrence of certain events.
Whether force majeure includes the Coronavirus outbreak will largely depend upon the definition of force majeure within the individual contract between the parties. If a contract does not include a force majeure clause, or is not worded so as to include the pandemics, no protection from breaches of contract will be afforded.
Even where a force majeure clause is contained within a contract, it will be essential to ensure that any notice or procedural steps are followed. It is also possible that such provisions could be challenged by consumers, particularly where deposits or advance payments are not refunded on grounds that the clause is “unfair” under the Consumer Rights Act 2015.
Another potential exception to the general rule requiring the ongoing performance of contractual obligations is the doctrine of frustration.
A contract may be discharged (or brought to an end) on grounds of frustration when something occurs after the formation of the contract which means that it is physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. The event must go to the heart of the contract, must have been beyond contemplation when the contract was entered into and make further performance impossible, illegal or radically different from that contemplated by the parties. Whether frustration applies will require careful analysis of the relevant contractual obligations and circumstances and it should be borne in mind that difficulties in performing a contract or the desirability of cancellation (perhaps by reference to Government guidelines) will not necessarily mean a contract is frustrated.
Where frustration arises, the contract will be brought to an end automatically. The Law Reform (Frustrated Contracts) Act 1943 provides that:
- Where a party has paid money to the other contracting party before the frustrating event arises, the money is to be repaid less an allowance for expenses incurred in performing the contract; and
- If a party owed money under an obligation having fallen due before the contract was discharged by reason of frustration, the money will not be payable, although the other party may recover an amount for expenses not exceeding the sum owed.
It is important that contracting parties understand their rights and obligations and please contact the Litigation & Dispute Resolution Team on 01603 610911 or email them here for more information or advice regarding concerns about how the implications of the Coronavirus pandemic on your contractual and legal obligations.
Note: The contents of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any particular circumstance. This is also a fast developing area, with the Government currently issuing additional measures and updates on a daily basis and further legislation is expected to be passed in the near future, and we cannot guarantee the contents are up to date therefore.