Is Covid-19 a valid ground for avoiding contractual obligations
Is Covid-19 a valid ground for avoiding contractual obligations
What legal options are available to you if a supplier or other organisation does not meet its contractual obligations to you because of the COVID-19 crisis? Let’s find out.
At time of writing, the UK is beginning the second week of lockdown because of the Coronavirus. Travel is strictly limited; many businesses are closed; all but essential workers are forced to work from home. We do not know how long these measures will last.
For business owners, this is a worrying time, on top of the health implications for themselves and their loved ones. The virus and the associated restrictions will mean meeting contractual obligations will be difficult, or even impossible. On the other hand, they may find businesses that they buy from may not be able to fulfil contractual obligations to them. For example, a supplier may not be able to make an essential delivery on time, or they may have to cancel an event.
The question is, where do you stand legally if a company you do business with does not meet its contractual obligations as a result of the Covd-19 crisis? Can you assert that it must fulfil its promises, or recompense you for its failure? Let’s try to find out.
Two options
In English Law, companies can cite two reasons why they may not be able to meet their contractual obligations during an unprecedented time like this. These are:
Frustration – a common law doctrine
Force majeure – a specific clause in a contract
We’ll look at these in more detail.
Frustration
Frustration is part of common law, so it doesn’t have to be explicitly included in the contract. A party can cite frustration when they cannot perform their contractual obligations because something has happened after entering into the contract that has made it impossible to fulfil.
The grounds to establish frustration are:
Temporary unavailability – if the person (or object) that fulfils the contract is not available for a period of time
Failure of a specific source – if the subject matter of the contract becomes unavailable. For example, agricultural output after a crop failure
Method of performance impossible – if the way the company is going to fulfil the contract cannot be used, while no replacement method is available
Illegality – if the contract becomes impossible to fulfil because of a change in the law
Understandably, parties may look to raise these grounds in the context of the current pandemic. They may feel they are not able to fulfil their contractual obligations because the Coronavirus restrictions have frustrated the contract. Emergency law changes could mean that workers and companies cannot fulfil what they have agreed, for example.
The success of a party in attempting to rely upon frustration will depend on the facts of the case. However, in the past, the courts have applied frustration quite narrowly, only in genuine cases with little leeway. The Courts will not easily allow a party to avoid a binding contract.
If frustration can be proved, the result is termination of the contract.
Force majeure
Force majeure is often included in contracts to provide one or both parties with a method of mitigating the failure to meet their obligations when unexpected events happen. It is designed to excuse a party when something happens outside of both parties’ reasonable control.
Force majeure clauses in contracts often specify the events that could be considered as grounds for non-fulfilment, for example, an Act of God or war. It’s certainly possible that a pandemic like COVID-19 could be included in a force majeure clause either expressly or by implication, as well as law changes such as the emergency legislation the Government has brought in.
The force majeure clause may also specify how far a party can rely on this unexpected event. Does the event have to ‘prevent’ the performance of the contract , or can it be relied upon if performance is merely ‘hindered’ or ‘delayed’? How a court in England would see it depends on the exact nature of the contract and its clauses.
If force majeure can be proved, then you must refer to the contract to determine what happens next. The other party may be able to suspend their obligations for the duration of the force majeure event, or they may be able to terminate the contract, or something in between.
Find out more
If you are worried about your business’ contracts at this time, you are advised to talk to a solicitor. They will be able to give you legal advice, as well as act on your behalf if necessary.
At Couchman Hanson, our solicitors genuinely care about getting the best outcome for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits with our values of integrity, honesty and authenticity.
Call us today on 01428 722189