Since the Government’s lock down announcement on 23 March 2020 two relatively obsure – and little invoked – legal concepts have assumed a far greater significance in the world of commerce and contractual relationships.
The concepts are ‘force majeure’ and legal ‘frustration’ of a contract. If businesses did not know anything about them before, now they really do need to know what they are and how they could affect their legal contractual relations with other businesses.
‘Force majeure’ applies when a written contract between party A and party B contains a clause that provides for what is going to happen in the event of an unforseen circumstance that prevents either party A or party B, or both parties, to the contract from being able to perform the contract or a particular term of the contract.
A typical ‘force majeure’ clause may refer to what will happen in the event of an earthquake or an act of God. The latter is a term that is likely to include pandemics like COVID-19, although some force majeure clauses expressly refer to epidemics and pandemics.
Force majeure clauses are important because if you are in difficulty peforming a particular contractual obligation as a result of COVID-19 it might act as a get out.
Similarly, if a party you contract with is defaulting on a contractual obligation and asserting that they have a legal right to be excused from that obligation, or to have extra time to comply because of a force majeure clause, then you need to know whether what they are asserting is correct, or whether you have a right to enforce the terms of the contract and perhaps threaten termination of the contract if they do not comply.
‘Frustration’ of a contract is a legal doctrine applied by the Courts and where there is no force majeure clause. It can therefore apply to simple oral contracts. The principle is that a contract is ‘frustrated’ and may be discharged when an unforseen event occurs after formation of the contract that renders performance of the contract impossible.
With the Coronavirus Restrictions Regulations the impact on some businesses being forced to close has meant that Legislative / Executive action has caused the perfomance of some contractual obligations to be ‘illegal’. The effect of this ‘supervening illegality’ is something that particular businesses that are not permitted to operate need to know about as it might well ‘frustrate’ the perfomance of a particular contract or term of the contract.
However, whether or not compliance with a particular contractual term can be excused or a contract ended through the invoking of a force majeure clause or the principles of frustration will depend on the particular circumstances and in the case of force majeure the particular wording of the clause.
Here are five questions that businesses need to be considering:
1. Do you have a written contract with the other contracting party and, if so, does it contain a ‘force majeure’ clause that might apply to COVID 19? i.e. does it reference Acts of God, Pandemics and Epidemics or ‘any other cause beyond the parties reasonable control’ (which is a wider general ‘sweep up clause’)?
2. Does the force majeure clause expressly stipulate any particular steps that must be taken to trigger it such as giving written notice to the other party sent to a particular address? If so, then these steps must be adhered to.
3. Has COVID-19 actually made performing the contract or the particular term impossible or is it just more onerous to perform? If you are required to supply a product and could still do so, but it is more expensive or you would have to source it from another supplier, then the force majeure clause and the doctrine of legal ‘frustration’ are unlikely to apply.
4. Has Government legislation made it impossible and illegal for your business to open and operate? If so then impossibility of performing the contract caused by supervening illegality may provide you with a defence to any allegations of breach of contract.
5. If you are engaging in dialogue with other contracting parties, keep an accurate record of your discussions (who, when and what) and be prepared to seek legal advice particularly if termination of contracts is on the agenda. Wrongful termination of a contract by a party can be a very costly mistake.