Covid-19 and Contracts

27 Mar 2020
In times of crisis, which these undoubtedly are, it’s easy to give in to panic. There has been ample evidence of it, not least in the scenes of shoppers forming huge queues, empty shopping trolleys at the ready.

In a business context, it is often tempting to take the same approach. Tempting but wrong.

Law firms have not been slow to issue briefing notes addressing the challenge of Covid-19, coupled most often with explanations of the contractual rights which may be triggered by events relating to the life-threatening virus. Most recent legal updates have dealt principally with the concepts of force majeure and, alternatively, the doctrine of frustration as potential mechanisms by which contacts might be suspended or terminated.

We will briefly summarise those two concepts but advocate an approach which may offer a more practical and defensible means of addressing any contractual issues which may have arisen as a consequence of Covid-19.

Force Majeure


The concept of force majeure applies to events which are typically outside the control of a contractual party and which either prevent or hinder that party in its performance of the contract. Crucially, force majeure is not a stand-alone concept in English law, so it will only apply if the contract contains specific force majeure language.

Force majeure clauses vary hugely in the way they are worded and also in the steps required to invoke or take advantage of them. There is therefore no fixed way of approaching these clauses, so each event and relevant clause needs to be assessed and interpreted on a case by case basis.

If the clause specifically refers to ‘epidemic’ or ‘pandemic’, it may well cover Covid-19. If not, the specific wording of the clause will have to be assessed to determine if it applies to the current crisis, taking into account a number of factors, including the specific wording of the clause, whether it is exhaustive or illustrative in its terms, the contractual framework, nature of the contractual obligations, the degree of impact and whether it is possible to work around the issues caused.

Force majeure clauses often also contain requirements which any defaulting party needs to meet before it can take the benefit of the clause.  For example, the defaulting party may have to provide notice of the force majeure event and/or take all reasonable steps to mitigate or work around the impact. There may also be time limits for those actions, so it’s important to review the contractual terms and determine if contractual obligations or processes have been met in order to keep open the possibility of using the force majeure clause if needed.

All in all, and no matter what you intend to do, it makes sense to review your contracts and check where you stand contractually. None of us knows how long and deep the impact of Covid-19 will be, so assess the impact now and consider options for addressing the issues faced.

Frustration

If the contract concerned does not contain a force majeure clause, it may be possible to rely on the doctrine of frustration. However, this concept has been pleaded successfully only on rare occasions so it’s not one that is likely to be readily available.

A contract is frustrated when performance is impossible, illegal or when performance is radically different from that originally contemplated.  If it applies, the contract concerned is brought to an end automatically by operation of law, irrespective of the wishes of the parties.

The courts don’t like the concept and have made clear ‘it is not lightly to be invoked’. It’s also not a mechanism to be used to escape a bad bargain. Covid-19 is a highly unusual situation, so we can’t rule out the possibility of a contract being frustrated as a result but it’s not likely to apply in many cases, if at all.

So, what to do?

Irrespective of whether you might wish to terminate or suspend performance under a contract it’s important to ensure that your contractual rights or remedies are preserved if contractual requirements are not met or are substantially below expectations as a result of the current circumstances.  It’s all too easy to waive contractual rights or perhaps to be seen as acquiescing or accepting reduced or defective performance, so care is needed.

Ignoring the issue is not advisable, so here are our recommendations for good practice:

  1. Keep all commercial contracts under review;
  2. Where contracts are affected by Covid-19, assess the impact and review the specific terms of the relevant contract in order to assess what rights available under the contract as a consequence of recent events;
  3. If the contract contains a force majeure clause, look carefully at what that clause says, what it covers and what steps are required to comply with or invoke the rights under that clause;
  4. Carefully consider whether you want to invoke any rights under that clause and, if so, to what extent;
  5. Don’t ignore your contractual rights. Failing to invoke your rights and/or putting up with substandard performance could be viewed as either a waiver of your rights or some form of acceptance or acquiescence of defective performance;
  6. Consider cooperating with your contractual partner to find a way to work around the current problems and finding a way to help each other through this crisis;
  7. Consider varying or amending the contractual terms in view of Covid-19 and preserving your position under contract so avoiding any argument about potential waiver or acquiescence. You could consider placing a time limit (perhaps three or six months) on the variation and revisiting the issue at the end of that period; and
  8. Keep things under review and be prepared to amend or adjust the position circumstances change.

We are all in an extremely difficult situation right now. It may be tempting to pull up the drawbridge and focus on one’s own needs and interests. However, if we all adopt an understanding, cooperative approach it may make sense legally and commercially and help ensure we are all in decent shape for picking up relationships and contracts when things look brighter.