Emma Hughes-McEwan Managing Associate
What happens if you can’t perform your contract as a result of Covid-19; Force majeure and doctrine of frustration in the context of Covid-19
Whilst the health and wellbeing of society as a whole is at the forefront of everyone’s minds, business owners are likely to have additional concerns in circumstances where it is difficult, or in some cases impossible, to perform contracts entered into prior to the Covid-19 pandemic.
Those businesses who are unable to perform their obligations under the contract, will need to review the terms of the contract itself to see if they are able to avoid or mitigate a liability which could otherwise amount to a breach of contract.
Non-performing parties may seek to rely on the contractual force majeure provisions and/or the common law rules on frustration so as to avoid liability for what would otherwise be a breach of contract.
A Force Majeure clause
Force Majeure is an unforeseeable circumstance that prevents someone from fulfilling the terms of a contract.
This type of clause, if inserted into a contract, typically seeks to excuse one or both parties from the performance of the contract in some way following certain unforeseeable events. Its underlying principle is that in the event something which is outside a party's control occurs that has a material effect on the ability of that party to perform its duties under that contract, that party could be excused from, or entitled to suspend performance of all or part of its obligations. That party may not be liable for its failure to perform its obligations (whether in their entirety or in part), in accordance with that clause.
Force Majeure clauses are often used in contracts to ensure that a party is protected against the inability to perform contractually binding obligations owing to the limited remedies available to parties under English common law when a contract becomes difficult or perhaps more importantly in the current circumstances, impossible to perform.
As there is no Doctrine of Force Majeure in the English and Welsh legal system, case law is clear that no term will be implied into a contract, which does not contain an express provision to this effect so no protection would be provided.
The wording of the term is vital in ascertaining whether the clause will apply in an event such as a pandemic. Often, what constitutes a Force Majeure event is ʹAn act of God ʹ which will could trigger this clause to enable you to rely on in an attempt to terminate the contract.
This does need to be looked at on a contract by contract basis. Some clauses opt for a very wide definition such as “any event or circumstance beyond the foreseeable control of the party”, whereas others are much narrower and contain, for example, a list of events that are intended to be covered.
It is highly unlikely that a clause makes specific provision for Covid-19, but this may be covered under a “catch all clause” or under express wording such as “pandemic” or “disease”.
The party to the contract that seeks to rely upon such clause, will be required to prove the impact of the event to which has hindered or completely prohibited their ability to perform the contract either in whole or in part. This exercise, will be required to be undertaken by the party to conclude why that performance of the contract has been prevented.
It is prudent to determine whether the Force Majeure clause has been triggered and if successful, that party’s obligations will typically be suspended or prevented until the event ceases.
Doctrine of Frustration
In the absence of an express clause, the common law Doctrine of Frustration may apply.
Frustration only applies in certain limited circumstances where the performance of a contract has become impossible. It offers limited relief and remedies to the parties to the contract.
Frustration is a Common Law means of identifying circumstances which are serious and unforeseen that the law cannot justifiably expect the parties to continue with their obligations under the contract.
The effect of the Doctrine of Frustration is to terminate the contract immediately upon the occurrence of an event and to release the parties from their obligations.
It is therefore imperative that you determine whether the contract leaves sufficient room for the doctrine of frustration to operate under such circumstances.
Avoiding a Dispute
It is vital to determine, in the first instance, whether the terms of the contract itself allow reliance on a Force Majeure clause when a party is unable to perform obligations under the contract.
Each contract differs, so a review of such a clause is the first step as it may set out whether an event such as Covid-19 (or a wider definition of issues that could include Covid-19) is contained within this definition.
You should not assume that you are covered if unable to perform the obligations, as you may be in breach, and susceptible to a dispute or claim arising as a result.
We would always suggest that you enter into a dialogue with the party with whom you owe a contractual duty or with whom a duty is owed to you, to try and discuss options as to how the contract can be fulfilled, however this may often not be possible.
Ince can review your contract and advise you in trying to protect your position. Please contact our Dispute Resolution team on 02920 100 950, or email firstname.lastname@example.org should you be unclear as to whether the terms of your contract allows you to rely upon the Force Majeure clause. Alternatively, we can advise as to whether the Doctrine of Frustration may apply to avoid any disputes from arising, should you wish to terminate your obligations under the contract as a result of these unprecedented circumstances.
The article was written by the Cardiff Dispute Resolution team.