Performance of Commercial Contracts in unprecedented times

As the Coronavirus continues to spread and we, as a country, are subject to further restrictions which impact the operation of all businesses, naturally business owners are concerned about their exposure where unable to perform under commercial contracts.

The article is intentionally brief – at a time when we are inundated with daily briefings, new facts and figures and are working tirelessly to adapt to trading our businesses in new ways, time is of the essence.

Woodfines will issue a number of articles over the coming weeks regarding the Coronavirus and its impact on business. Our team, is available to help any business that needs advice regarding their commercial contracts, at this unprecedented time.

Performance under commercial contracts

On the face of it, non-performance under a contract will be a breach of contract, subject to two key exceptions:

1. An express force majeure provision within the contract which is drafted widely enough to encompass the pandemic:
2. In the absence of this, reliance on the common law doctrine of frustration.

Force Majeure

The starting point is to check the commercial contract for a force majeure clause. Force majeure clauses normally provide that a party will be excused from performance under a contract, on the occurrence of a specified event or circumstances outside of the breaching party’s control.

If the clause is not drafted widely enough to include a pandemic or perhaps, delays attributable to government action or new legislation by government, then you need to look to the doctrine of frustration.

The burden to show that the force majeure clause is drafted widely enough to include the Coronavirus outbreak, sits with the business seeking to rely on the clause.

Where the force majeure clause is drafted widely enough to include the Coronavirus outbreak, the business will need to comply with any notice or procedural requirements set out in the contract carefully, if it is to rely on the effect of the force majeure clause.

The effect of the force majeure clause will depend on its drafting but can allow for example, temporary suspension of obligations under a contract whilst the force majeure event continues, a right to terminate the contract or the removal of liability for a party’s non-performance.

The party seeking to rely on the force majeure clause, will need to show that Coronavirus is the sole cause of their non-performance or delay and that the impact of Coronavirus upon their ability to perform its obligation was beyond their control. A party will need to show that they took all reasonable steps to prevent the impact of the Coronavirus on their performance under the contract.

Where you are in any doubt regarding your ability to rely on a force majeure clause, please contact our dispute resolution team.

Frustration

This common law principle has evolved through case law since 1863. In summary, the principle allows for a contract to be discharged on the grounds of frustration where an event occurs after formation of a contract and where the event renders it physically or commercially impossible to fulfil the contract, or changes the parties’ obligations so radically from that agreed at entry into the contract, that it would be unjust to compel the contracting parties to continue.

Frustration is notoriously difficult to prove given the requirement that further performance under the contract be “impossible”. The Court’s have tended to permit the discharge of a contract on the grounds of frustration in times of war or extreme events. For example, i) when the Court’s discharged an export contract on the grounds of frustration where performance was impossible due to the Second World War and ii) where the Court’s discharged contracts relating to “Coronation events” which were impossible to perform due to the postponement of King Edward VII’s coronation owing to illness. Whilst we are not in a period of war, as a country we are in many ways implementing war-time measures and therefore, it is highly likely that we will see the Court order discharge of contracts on the grounds of frustration, as a result of the Coronavirus outbreak.

For advice regarding whether you are likely to be able to rely on the doctrine of frustration, please contact our dispute resolution team.

-Maria Koureas-Jones