COVID-19: The effect of force majeure and frustration on your contracts25/06/2020
We live in unprecedented times and the impact of coronavirus on all aspects of our lives cannot be overstated.
For many businesses, the coronavirus pandemic has been hugely disruptive and may mean that you are unable to carry out your contractual obligations. This can in turn leave your business exposed to a damages claim against you.
We appreciate the struggles that many businesses are facing and we are here to help you understand how you can reduce the potential impact of coronavirus on your contracts during this pandemic.
Force majeure: what is it?
Commercial contracts often include a “force majeure” clause, which is the name given to a contractual term which deals with what happens if there’s an unforeseeable or extraordinary event beyond your control, for example a war or terrorist attack.
Should one of these unforeseeable or extraordinary events happen, the force majeure clause would usually allow you to delay performance or completion of your contractual obligations. If it does, there would be no breach of contract (but if it doesn’t, you may still be liable for a breach of contract claim).
However, you can only rely on a force majeure clause to the extent it covers the specific event which has led you to being unable to perform the contract. Issues arising from coronavirus will only be covered by a force majeure clause if they either explicitly or implicitly mention them, which isn’t always entirely clear. If you are in doubt, you should always obtain expert legal advice on the precise wording of your contract.
You should also be aware that if you supply goods or services directly to consumers, strict controls apply to force majeure clauses. As such, what follows refers solely to the legal position with regard to business-to-business contracts. Expert advice should be obtained if you wish to include force majeure clauses in your contracts with consumers.
When does force majeure apply?
If you want to rely on a force majeure clause (for example because you have been or may be late fulfilling your contractual obligations due to an unforeseen event),
As soon as you know that you will be unable to perform your contractual obligations (and so need to rely on the force majeure clause) and notice has been served, you should usually stop performing your contractual obligations at that point in time. This is because some legal cases suggest that if you try your best in spite of the unforeseen event, you may not be able to rely on a force majeure clause, for example because your earlier attempts to perform may be seen as evidence that it wasn’t in fact impossible to comply with the contract as normal. Therefore, while it is often tempting to power through in times of uncertainty and try and fulfil your contractual obligations, you should be aware that this could remove your ability to rely on force majeure and means you may have to continue to perform your contractual obligations for the duration of the force majeure event or be in breach of contract.
Potential problems with relying on force majeure clauses
One such option might be to rely on the legal concept of “frustration” instead. This may come into play if a contract becomes impossible to perform due to a serious and unexpected event occurring, which is beyond the control of the parties and which makes it physically or commercially impossible to fulfil the contract (or transforms the obligations under the contract into something which is radically different to what was originally intended).
Unfortunately, it is generally very difficult to prove that a contract has been frustrated, even during the coronavirus pandemic. For example, a contract to supply services could potentially be fulfilled remotely through staff working from home. If so, the contract would not be frustrated, as it would clearly not be impossible to comply with it, nor would the obligations be radically different to what was intended.
It may be easier for those dealing in the supply of physical goods to demonstrate that a contract has been frustrated (both in a manufacturing context and also if you are dependent on third party logistics partners for distribution and deliver), although each case will turn on its facts.
How we can help
If you think you may be able to rely on a force majeure clause in your contract, or that it may have been frustrated, you should seek expert legal advice before deciding on a particular course of action.
Acting without this guidance may expose you to risk and damage you could otherwise avoid. Our experienced and expert advisors will help you to identify the safest options to navigate your way through the legal issues arising from the current coronavirus crisis.