Businesses are understandably concerned about the implications of the Covid-19 pandemic and may be wondering what the position will be if they find themselves unable to perform a contract due to the impact of the virus. This could be as a result of restrictions being imposed by government on large gatherings of people, the closing of schools, or restrictions imposed on travel.
If a business is prevented from performing a contract, or performance is severely hindered, the first thing to consider is whether there is a “force majeure” clause in the contract. A force majeure clause excuses a party from performance of a contract where an event occurs which is beyond the reasonable control of the party, and that event hinders performance or makes performance impossible.
Businesses are advised to take legal advice on whether Covid-19 may amount to a force majeure event under the contract in question, and whether the circumstances excuse them from performance of the contract. What constitutes a force majeure event will differ in each case.
Other issues for consideration are whether the clause in question deems there to have been a force majeure event where performance is significantly hindered, or only where performance is rendered legally or physically impossible.
It is important for businesses to be aware that if there is to be any possibility of Covid-19 excusing them from performance under a force majeure clause, the impact of Covid-19 must be the sole reason the party is unable to perform.
Importantly, if a party wishes to rely on a force majeure clause it must ensure it complies with the notice (and any other) requirements of the clause. If this is not done the party may lose the benefit of the clause.
If the force majeure clause successfully excuses a business from performance of the contract, this is unlikely to be forever. Once the impact of Covid-19 comes to an end the contract will be re-activated. However, in some cases a party may be entitled to terminate the contract after a period of time if it would be commercially unfeasible for the parties to resume performance of the agreement once the force majeure event has ended.
If the contract does not contain a force majeure clause, the party who is unable to perform the contract may rely on the doctrine of “frustration”. Where an event such as Covid-19 occurs after the contract has been entered into which renders performance physically or commercially impossible, the contract may be frustrated and the parties will no longer be bound to perform their contractual obligations. The doctrine of frustration will only apply if the intervening event is due to no fault of either party, and it must render further performance impossible, not just difficult. If an alternative method of performance is possible, or the parties have included a force majeure provision in their agreement which covers the unforeseen event, then the contract is unlikely to be frustrated.
Circumstances in which the doctrine of frustration will be invoked are narrow, however, if there is a state-imposed lockdown in future week or months, or contractual obligations cannot be performed because of a restriction on travel, it is possible this doctrine will apply. In most cases that will allow recovery of monies paid under the contract before the intervening event.
In cases where frustration doesn’t apply, parties will be reliant on there being an express force majeure clause in their contract which covers the Covid-19 pandemic.
Myerson’s team of experts on contract law are available to discuss these complex issues should they arise, and we advise businesses to seek advice as soon as possible so they understand their rights and can take all necessary steps to protect their position.