Businesses need to understand the liability they have or can
avoid due to the impacts and consequences of COVID-19. Here are
some of the key considerations to think about now:
1. Can I avoid performing a contract because of the pandemic?
First you need to check whether your contract has a
clause for "impossibility/force majeure/events outside your
control". This clause is used to relieve parties of
their liability for non-performance where non-performance is due to
circumstances beyond their control.
If a contract contains such a term, the wording needs to be
carefully reviewed to check whether it offers the relief you need
in the situation you are relying on it for. To be useful against
the effects of COVID-19 the clause would need to cover epidemics,
pandemics, quarantines, acts of public/governmental authorities or
wider language such as an Act of God. Under English law, the value
of a clause to any party depends very much on the wording and
circumstances as there is no statutory meaning to force
majeure.
Contracting parties who wish to seek to rely on this clause must
consider all alternatives and be prepared to justify why their
performance was impossible and could not have been completed by any
other means within their control. A party must also prove that the
event was the only cause of its breach i.e. if it would not have
been able to meet its obligation in any event, for some other
reason, then such an argument will fail.
If your contract does not include the above clause or you
cannot rely on it, check any terms relating to
cancellation: this clause will set out the liability and
notice requirements in the event that a party terminates a contract
by their own choice (e.g. taking a precautionary and proactive
approach to protect the health and safety of employees or
customers), in which case they are usually expected to bear a
reasonable share of the cost or loss to the other party, as the
cancellation is not forced beyond their control. Any charge should
be based on a reasonable and proportionate attempt to predict and
recover the other parties' actual costs and losses and should
not penalise the cancelling party or create a profit for the other
party. It is reasonable to request the evidential basis of any such
charges.
If you still cannot find a useful way out, check for any
terms allowing for variation, suspension or termination:
any terms relating to these are worth checking to see if they
provide the parties with the freedom to negotiate, agree
alternatives, preserve or end the contract in the best interests of
either or both parties.
Frustration of the contract: If you cannot rely
on any of the above clauses, then there may, in limited
circumstances, be the possibility of claiming a contract has been
frustrated by a change in circumstances without the fault of the
party seeking to rely on it, but only where a party's
performance has become radically different from its original
obligations. The scope for using frustration of contract is narrow
as courts are reluctant to allow one party to terminate outside of
the contracted terms and without any further liability.
2. What if the other party refuses or is unable to perform its obligations as a result of the pandemic?
First you should check the reason why the breaching party is not
going to perform its obligation and, if it is covered in the
contract, the term they are breaching and what type of term it is
(e.g. is it a vital term which goes to the heart of the contract or
a warranty (promise)?
If the breach has serious consequences then it may amount to a
"repudiatory" breach (at common law) giving the innocent
party a right to claim damages and terminate or affirm the
contract. An outright refusal to perform substantially all of a
party's obligations under the contract is a form of repudiatory
breach known as renunciation. It is vital to assess the situation
carefully, however, before making any assumptions or taking any
action, to check you have the right to do so and recover any losses
you wish to seek. Getting it wrong (e.g. terminating where the
other party's breach is not serious enough to justify
termination by you) can result in you committing a repudiatory
breach yourself and then being liable for the other side's
damages.
3. What if the other party refuses to pay when a contract has already been performed?
Payment obligations are strictly enforced under English and
Welsh law. It would be extremely unlikely that a party could claim
relief from complying with a payment obligation due to an event of
force majeure will. Usual enforcement processes and procedures
would need to be followed.
There is no "one size fits all" approach and your
response needs to be tailored according to your relationships, the
particular circumstance and the relevant contracts you have in
place. Being aware of your potential liability by having oversight
and planning now could be vital to minimising the impact and cost
to your business.
The Vistra Corporate Law commercial team are ready
to assist you with contract reviews and astute advice on the best
action to take, so please don't hesitate to get in
touch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.