Contracts and Covid-19

With all the uncertainty over the current Coronavirus pandemic we are getting various enquiries about contractual situations and what happens when one party is potentially unable to perform their obligations under a contract at the present time. English law requires a party to perform their obligations, or face a claim for breach of contract

Contract law is far from straightforward, but there are two possible exemptions that might apply here. Firstly whether there is a “force majeure” clause that applies to the contract, or secondly whether the contract has been “frustrated”.

Force Majeure

Many business contracts have a force majeure clause which if applicable will say what happens in certain circumstances where one party is unable to perform their obligations. It will set out the circumstances that constitute a force majeure. Whether Covid-19 will fall under the clause will depend very much on the wording of the clause and each clause needs to be interpreted on its own wording.

If the clause does potentially apply, then it will set out what the party who wants to rely on it needs to do, there may be strict notice requirements to adhere to. It will also set out what relief the party is entitled to – for example an extension of time to perform their obligations without penalty, or the right to terminate the contract.

Frustration

If there is no force majeure clause the principal of frustration may apply, but its use is quite limited. It provides that a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.

If frustration does apply, the Law Reform (Frustrated Contracts) Act 1943 allows for recovery of money paid under the contract before it was discharged. However, in some cases the Court may allow the other party to deduct any expenses it has incurred.

In the midst of the current Covid-19 lockdown there will certainly be contacts that are frustrated, for example a hotel that is now unable to accept guests. The booking will be cancelled and the guest will be entitled to a refund of all money paid to date. However, for bookings later in the year, the contract is not yet frustrated because the hotel may have re-opened by then. A guest seeking to cancel a future booking (when the hotel might be open) will have to comply with the hotel’s normal cancellation policy.

Contracts which can still be performed, albeit more difficultly or more expensively, are not frustrated and any party seeking to rely on Covid-19 as an excuse to get out of their obligations may face difficulties and a potential claim for breach of contract.

If you are unsure of your contractual obligations, one of our dispute resolution lawyers will be able to advise you. Please have all the contract documentation and relevant correspondence ready. A timeline of key dates and developments will help us.

Published 1 April 2020

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