Businesses need to understand the liability they have or can
avoid due to the impacts and consequences of COVID-19. Here are
some of the key considerations to think about now:
1. Can I avoid performing a contract because of the pandemic?
First you need to check whether your contract has a
clause for "impossibility/force majeure/events outside your
control". This clause is used to relieve parties of
their liability for non-performance where non-performance is due to
circumstances beyond their control.
If a contract contains such a term, the wording needs to be carefully reviewed to check whether it offers the relief you need in the situation you are relying on it for. To be useful against the effects of COVID-19 the clause would need to cover epidemics, pandemics, quarantines, acts of public/governmental authorities or wider language such as an Act of God. Under English law, the value of a clause to any party depends very much on the wording and circumstances as there is no statutory meaning to force majeure.
Contracting parties who wish to seek to rely on this clause must consider all alternatives and be prepared to justify why their performance was impossible and could not have been completed by any other means within their control. A party must also prove that the event was the only cause of its breach i.e. if it would not have been able to meet its obligation in any event, for some other reason, then such an argument will fail.
If your contract does not include the above clause or you cannot rely on it, check any terms relating to cancellation: this clause will set out the liability and notice requirements in the event that a party terminates a contract by their own choice (e.g. taking a precautionary and proactive approach to protect the health and safety of employees or customers), in which case they are usually expected to bear a reasonable share of the cost or loss to the other party, as the cancellation is not forced beyond their control. Any charge should be based on a reasonable and proportionate attempt to predict and recover the other parties' actual costs and losses and should not penalise the cancelling party or create a profit for the other party. It is reasonable to request the evidential basis of any such charges.
If you still cannot find a useful way out, check for any terms allowing for variation, suspension or termination: any terms relating to these are worth checking to see if they provide the parties with the freedom to negotiate, agree alternatives, preserve or end the contract in the best interests of either or both parties.
Frustration of the contract: If you cannot rely on any of the above clauses, then there may, in limited circumstances, be the possibility of claiming a contract has been frustrated by a change in circumstances without the fault of the party seeking to rely on it, but only where a party's performance has become radically different from its original obligations. The scope for using frustration of contract is narrow as courts are reluctant to allow one party to terminate outside of the contracted terms and without any further liability.
2. What if the other party refuses or is unable to perform its obligations as a result of the pandemic?
First you should check the reason why the breaching party is not
going to perform its obligation and, if it is covered in the
contract, the term they are breaching and what type of term it is
(e.g. is it a vital term which goes to the heart of the contract or
a warranty (promise)?
If the breach has serious consequences then it may amount to a "repudiatory" breach (at common law) giving the innocent party a right to claim damages and terminate or affirm the contract. An outright refusal to perform substantially all of a party's obligations under the contract is a form of repudiatory breach known as renunciation. It is vital to assess the situation carefully, however, before making any assumptions or taking any action, to check you have the right to do so and recover any losses you wish to seek. Getting it wrong (e.g. terminating where the other party's breach is not serious enough to justify termination by you) can result in you committing a repudiatory breach yourself and then being liable for the other side's damages.
3. What if the other party refuses to pay when a contract has already been performed?
Payment obligations are strictly enforced under English and
Welsh law. It would be extremely unlikely that a party could claim
relief from complying with a payment obligation due to an event of
force majeure will. Usual enforcement processes and procedures
would need to be followed.
There is no "one size fits all" approach and your response needs to be tailored according to your relationships, the particular circumstance and the relevant contracts you have in place. Being aware of your potential liability by having oversight and planning now could be vital to minimising the impact and cost to your business.
The Vistra Corporate Law commercial team are ready to assist you with contract reviews and astute advice on the best action to take, so please don't hesitate to get in touch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.