No time to deliver? – COVID-19 and failure to perform contract

25th March ‘20

No time to deliver? – COVID-19 and failure to perform contract

The COVID-19 pandemic is causing significant economic disruption across global markets. Businesses are exposed across their supply chain as parties seek to delay or avoid performance of their contractual obligations, renegotiate prices or volumes of orders, and take other measures to ensure their survival.

Under usual circumstances, a delay or failure to deliver goods or services under a contract would likely give rise to a claim for breach of contract which, if successful, would entitle the aggrieved party to claim for various remedies including damages and/or specific performance.

However, these are not usual times – and businesses should consider measures that may entitle them to postpone or avoid their contractual obligations.

Force Majeure

Force majeure clauses allow a party to delay or avoid their contractual obligations following an unexpected event or circumstances outside that party’s control.

English law does not provide a general concept of force majeure relief: if the contract does not contain a force majeure clause, a clause will not be implied. However, if the contract does contain a force majeure clause, businesses must pay close attention to the wording to understand its scope and effect:

  • Is COVID-19 a force majeure event under the contract? Does the clause list contain an exhaustive list of events that constitute force majeure, such as ‘disease’ or ‘pandemic’, or alternatively provide examples of the sort of events that constitute force majeure, or even broad wording such as ‘events beyond the parties’ control’?
  • Is the impact of COVID-19 on the party’s ability to perform the contract sufficient? Does the clause require the party to have been prevented (e.g. physically or legally impossible to perform), hindered (e.g. where employees are in self-isolation) or delayed (e.g. difficulty in obtaining raw materials)?
  • What remedy does the clause provide? Does the clause provide an extension for deadlines or a right to terminate, or suspend the contract during the force majeure event with no liability? The clause may require the party to take certain steps in mitigation or, absent any specific wording, the party should take steps to avoid the event or the impact of its consequences.

If a party seeks to (or is likely to) rely on a force majeure clause, it should retain documentary evidence to show how COVID-19 has hindered, prevented, or delayed its performance; and what steps the party took in mitigation (or, if no steps were taken, the business’ consideration of mitigation). This includes documents showing the effect of governmental guidelines on the business (e.g. self-isolation, closing of non-essential shops etc.), the effect of third party’s actions on the business (e.g. inability to source raw materials or parts), and the decision-making process of the relevant committee or board.

Doctrine of frustration

A party may rely on frustration to terminate a contract where an event (i) occurs after execution of the contract; (ii) affects the root (purpose) of a contract; (iii) is unexpected; (iv) beyond the control and not caused by the party; and (v) makes performance impossible, illegal or radically different from that envisaged on entering into the contract.

Frustration is not available where the event was foreseeable or the contract makes specific provision for the event (e.g. a force majeure provision). Crucially, frustration is not available if a party can perform their obligations via a different method or if the contract simply becomes more expensive to perform.

If successful, frustration will automatically terminate the contract. For the majority of English governed commercial contracts, a party can recover money paid under a contract (save, at the court’s discretion, for expenses incurred by the other party) and is not liable for money due before the frustrating event, but not in fact paid (save, at the court’s discretion, the party shall pay a ‘just’ sum for any benefit it received before the event).

Points to consider

Parties should not view force majeure or frustration as an easy or risk-free way out of their contractual obligations. Strong opposition to any claim should be expected and a false declaration of force majeure may result in damages being payable for breach of contract.

Even if successful, parties should also consider the wider commercial implications of making a claim on their business reputation and should consider other options, such as claiming under an insurance policy or utilising government support.

For more information or guidance on this matter, please contact Rob Stewart, Litigation Partner on  rs@calibrate-law.com

This post is intended to be a brief note for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. Please speak to a member of our team.

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