CONTRACTS & CORONAVIRUS

At this difficult time, it is impossible to predict the full economic impact of the Coronavirus.  Undoubtedly, everyone will be affected in some way.  Most businesses are likely to see a shock at both ends: input and output.  This will, in turn, have a knock-on effect on other businesses.

When a business makes a contract with another, with a promise to do something, the starting point is that the contract must be fulfilled.  The law will generally ‘enforce’ the contract (normally, by awarding damages for a breach), because courts recognise the importance of businesses and customers having a degree of certainty that a contract will be fulfilled.

But there are occasions when obligations within a contract cannot be achieved.

Different considerations will apply, depending on whether the contract is made between two businesses, or between a business and a consumer.

The contract itself is the place to start.

Force Majeure

The contract might well contain a ‘force majeure’ clause.  Generally, such clauses are designed to excuse a party from having to perform its obligations, if that party is unable to do so because of something which is outside that party’s control.

Could the Coronavirus be a force majeure event?  Potentially, for some contracts, but unlikely for all.  It will largely depend on the obligation in question.  Just because it will now be less profitable to perform the obligation, or if it is harder to do so in the current environment, does not mean that a party will be excused from that obligation.

However, if the consequences of Coronavirus means that it is now illegal or impossible to perform the obligation, this may well be a force majeure event, which might mean a party is excused from an obligation or given more time to fulfil it.  In this situation, the contract will remain in place despite a delay in performance, although some force majeure clauses will state that if there is a long delay, the other party can terminate the contract.

The contract might say that a party must give written notice of any delay.  If so, it is important to comply, otherwise it might mean that the party is unable to rely on the clause at a later date.

Frustration

As well as force majeure events, contracts can sometimes be ‘frustrated’.  This is where there is a change in circumstances which means it is no longer possible to perform the contract, and where neither party is to blame.  An example is where one party agrees to provide a personal service to another, but the contractor cannot complete the obligations due to incapacity or serious illness.  However, note that frustration has not applied in cases where there has been a change in economic conditions, nor where a seller cannot fulfil the contract because he has been let down by his supplier.

If there is frustration, it will mean the contract comes to an end automatically.  Any losses will usually fall where they lie, as neither party will be able to claim damages.  There are some exceptions to this, as provided in the Law Reform (Frustrated Contracts) Act 1943, but this does not apply to all contracts.

Consumer Contracts

Contracts between a trader and a consumer are different.  A term which is unfair is not binding on a consumer.  An unfair term is one which causes a significant imbalance to the detriment of the consumer.  What is ‘fair’ depends on the contract, and the circumstances existing when the contract was agreed.

Summary and Recommendations

Frustration and force majeure are often difficult to argue.  Care should be taken before making a decision which might be construed as a breach of contract, as this will potentially result in a claim for compensation.

Coronavirus or not, the law is still the law.  But this needs to be qualified:  there is no precedent for this type of thing in our current age, so there is no precedent as to how courts will react.  There may be more emphasis on fairness and reasonableness, taking into account the difficulties of all parties.

It goes without saying that parties should try to work collaboratively to avoid a dispute arising.  Everyone is likely to be experiencing problems.  There is nothing to stop contracting parties agreeing to change the terms, to take into account the circumstances in which we all now find ourselves.

Our key recommendations are as follows:

• Check the contract carefully;
• Comply with any notice requirements;
• Try to resolve any problem with the other party;
• Take steps to minimise any losses, and keep detailed records;
• Check any insurance policies;
• Consider adding terms to new contracts;
• If in doubt, seek legal advice before making a decision.

If you need advice on a contract or dispute, you can contact us.   We remain committed to providing our full range of services, as well as being available to assist with any additional support you may require at this time.

 

ABOUT THE AUTHOR

Alistair Tawse is a barrister specialising in Marine Law and Personal Injury. With a degree in Marine Navigation, Alistair’s first career was in the Royal Navy. Alistair re-trained in law and qualified as a barrister, specialising in litigation. Alistair has experience in handling a breadth of marine insurance matters, including collision claims, shipping casualties and salvage, contractual disputes, and professional negligence.

Alistair can be contacted by email or on 01752 675740.