As governments scramble to contain the coronavirus and the World Health Organisation labels as a global pandemic, businesses are facing the fact that contracts they have entered into in good faith may not now be performed.
With some areas in quarantine, travel restrictions being advised and ports and workplaces being closed, companies are experiencing widespread disruption.
The impact has the potential to be commercially damaging and those who are unable to fulfil contractual obligations or who have been let down themselves are asking what their rights and responsibilities are.
Force majeure
A force majeure clause in a contract sets out what is to happen if one party cannot perform its obligations because they become impossible, illegal, inadvisable or commercially impractical following an event that is outside of the parties’ control.
In English law, force majeure must be specified in the contract, it will not be implied by the courts.
A force majeure clause should contain details of:
- The events which are held to constitute a force majeure. This will either be a list of specific occurrences which may include the words ‘epidemic’ or ‘pandemic’ or might be a phrase construing it as anything which prevents (or hinders or delays) performance of the contract and which is beyond the parties’ control.
- The way in which the parties should notify each other that they are invoking the clause. Any requirements should be strictly adhered to, for example, the need to send notice within a certain number of days of the event, or the method of service, which could be by email or to a particular office or address.
- The consequences of a force majeure event. A clause will often specify the extent to which the unexpected event must affect performance for it to qualify as a force majeure. This could be anything from complete prevention of contract fulfilment, through to hindrance or delay.
The courts interpret force majeure clauses strictly because of the potentially severe impact on a business. It is therefore important to consider all eventualities when having a contract drawn up.
Relying on force majeure
It is not advisable to assume that a force majeure clause can be relied upon. If this is contested and a court rules that there has not been a force majeure event, then it may be possible for the other party to claim breach of contract and request damages.
In China, the China Council for the Promotion of International Trade has started issuing force majeure certificates to applicants who can show proof of delays or cancelled transport or failure of export contracts or customs declarations following coronavirus restrictions. However, this type of certificate is not a guarantee that a court will find a force majeure has occurred.
If you are experiencing difficulties in fulfilling a contract or ensuring compliance with the contract, then it is advisable to seek independent legal advice on how best to proceed and how to minimise any possible liability.
Frustration
If a contract does not include a force majeure clause, it may still be possible to argue that it has been frustrated, i.e. that it is physically or commercially impossible to fulfil the contractual obligations because of the coronavirus situation.
In deciding whether a contract has been frustrated, the court will look in-depth at the terms and background of the contract, the parties’ understanding of the potential risk when signing it and the facts behind their belief that they cannot carry out their contractual obligations.
Should the court agree that a contract has been frustrated, it may be possible to recover some or all monies paid before the frustration.
Rights and responsibilities up to the point of frustration
If a contract is held to have been frustrated, then it will be automatically discharged, rather than simply having performance suspended. This means that any rights and responsibilities up to the point of frustration remain enforceable. Conversely, if rights were not in place at the time of frustration, then they cannot subsequently be enforced.
When there are no formal terms of business in place
Terms of business form the basis of a contract and set out in detail the goods or services you will provide, the extent of your liability, agreed time limits and agreed payment information.
In the event that no formal terms of business are in place, the courts will look at any evidence of what has been agreed and implied. These are terms that could be shown to be in place following a verbal agreement, written discussions or by actions which could constitute an agreement.
Courts are reluctant to imply contract terms and will only do so to comply with the law, on the basis of previous dealings or custom or where a party can show that they intended a term to apply but did not formally set it out in the terms of business.
Future contracts
With the possibility of continuing disruption from outbreaks of the virus, it is recommended that your future contracts contain detailed contingencies covering what will happen in the event that either party is unable to fulfil their obligations. This could be by way of a well-drafted force majeure clause and also by considering what reasonable alternatives you might be prepared to allow, should disruption occur.
At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. We have wide-ranging experience in commercial law and were named as the ‘Best Firm for Commercial Disputes in London’ in the 2019 SME Legal Awards as well as ‘Boutique Litigation Law Firm of the Year’ in the 2019 Global Awards by ACQ5.
If you would like to talk to one of our expert legal team about any queries you may have regarding Covid-19 and force majeure, or any other matter, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.
