We have all felt the damaging impact of coronavirus (COVID-19) on our daily lives. It is fundamentally a human crisis, but the impact on the global economy is also huge. Businesses have seen unprecedented effects across their operations, including disruption through their supply chains. This in turn has led to businesses being unable to supply their customers.
At the heart of most commercial relationships is a contract.
Contracts contain contractual terms that the parties agreed to at the time of contract. However, due to COVID-19, many contracting parties are now unable to meet or comply with those contractual terms.
With the continuing impact of COVID-19, what can businesses do to avoid breaking contracts they have agreed to? What are the options available to them?
In many cases, due to COVID-19, circumstances will have fundamentally changed since the parties contracted. COVID-19 may have resulted in business performance being delayed or even made impossible. The whole point of the contract may not even now exist. In such circumstances, parties will be keen to understand what their options may be.
What happens if your business performance is delayed due to COVID-19?
Potential options that may be available in this regard include:
- making arrangements with the other party to modify the terms of the contract so as to avoid breaking it
- asking the other party to waive (ignore) the delay or, in other words, not to insist on performance
- relying on a force majeure clause if one exists in the contract or
- insist that the contract has been frustrated (become impossible to perform)
Force majeure is a legal concept which allows a party to be excused from performance of its contractual obligations if it is prevented from performing them by circumstances beyond its control. Under English law there is no automatic right to force majeure. Therefore, if you want this to apply in an English law contract you will need a clause stating that a party is not liable for delays or failures in performance resulting from circumstances beyond its reasonable control.
What if you or one of the other parties want to get out of the contract due to COVID-19?
It may be that the effects of COVID-19 make it impossible or difficult for you or the other party to perform as agreed under the contract. In such circumstances, there are five main options that may be potentially available:
- re-negotiation of the terms of performance
- exercise of any rights of termination of the contract
- rely on a serious breach by the other party to bring the contract to an end
- rely on a force majeure clause or
- claim frustration
A cautionary note
Careful consideration will be needed to assess whether any of the above options can be potentially used. Each option is likely to be highly fact sensitive and it would be sensible to think carefully through the consequences of each. For example, force majeure clauses and the concept of frustration should only be used in certain circumstances. If you end the contract when you are not entitled to that will result in a wrongful termination which will mean the other party could bring a claim against you for its losses. Also you should consider your future business relationship with the other party. If you want to keep this intact, it may be better to try to agree a compromise (say, to defer delivery) than to insist on force majeure or claim frustration.