The Government’s Coronavirus lockdown has placed us in the unusual situation where performing a contract may, through no-one’s fault, prove impossible or even unlawful.
Whilst the Coronavirus Regulations have some exemptions for essential work, a lot of important business activity is nonetheless non-essential in this time of crisis. So, if you have committed to deliver something by a set date and that is no longer possible because of Government legislation – what then?
If you have a well-drafted contract or set of terms and conditions, they should include a “Force Majeure” clause. These clauses simply provide that where contractual performance is not possible due to a “higher force” one or more parties to the contract may be excused performance, or the contract may be terminated. A Force Majeure clause will usually include a long list of events that constitute “Force Majeure” including strikes, war, natural disaster etc. and will usually include a “sweep-up” definition of any event that is outside either party’s control. Be aware, however, that most Force Majeure clauses do require you to take some action to trigger them – usually a notification to the other side as a bare minimum.
What if you have no Force Majeure clause? In that case, strictly speaking, if you have contracted to deliver something on X date and that is now impossible due to the government legislation, you are in breach of contract unless you can do one of two things:
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Negotiate a variation to the contract with your counterparty; or
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Rely on the common law doctrine of Frustration.
What is Frustration? (apart from kicking your heels at home when you want to be out there earning a living). It’s a doctrine that has emerged in the Courts to say that, when performance of a contract becomes impossible through no fault of either party, the contract is immediately terminated with limited recourse for either party. The most recent cases on Frustration mostly date back to WW2, when trading with an enemy nation was a criminal offence. As different countries entered the war at different dates (and in some cases swapped sides) certain contracts became impossible to fulfil. Frustration is something you would present as a defence to a claim by the other side for breach of contract, but if you wish to terminate a contract now that is impossible to fulfil, then it would be worthwhile notifying your counterparty that you consider the contract to be frustrated. No Court will order performance of a contract that it is illegal to perform, or award damages for that non-performance, so termination of a contract as a result of Frustration is usually the end of the matter, save for reimbursement of any pre-payments made. If you would like further information here, we have set out a lengthy review of frustration in light of COVID-19 here.
We are in unusual times, and hopefully your contract counterparty will be sensible enough to realise that some flexibility will be required, no matter what the contract actually says, but if he is not, or it is in your interests to terminate the arrangement, the above may be of help.
For further assistance on any contract matters, please contact Iwan Emanuel on 01494 893570.