Dealing with existing contracts: a focus force majeure and frustration of contracts

In running your business you are no doubt entering into contracts whether they be providing customers with your standard terms and conditions, entering into service agreements, contracting with suppliers, entering into agency and distribution agreements or even contracting using industry standard form contracts, such as in the manufacturing and engineering business.

No matter what contract you have entered into there are often underlying themes running through each of them. Here we discuss force majeure clauses, frustration of contract, the doctrine of impossibility as well as other contractual performance clauses.

Force majeure clauses

You will often see a force majeure clause (sometimes still referred to as an act of God clause) in a contract. It may well be that COVID-19 constitutes a force majeure event, for example, some clauses define force majeure to include a pandemic. If you find yourself in a position where you need to declare that a force majeure event has occurred, then you must ensure that you abide strictly by the contract. To fall foul could mean that you find yourself incurring liability for breach of contract where for example you have incorrectly invoked a force majeure or not complied with notice provisions.

An established force majeure means you will no longer be required to perform the contract and allows you to avoid the termination of contract provisions. Usually an extension of time to target dates is given. Commonly, parties bear their own costs arising from any force majeure delay but there are exceptions where compensation may be payable after a certain duration or certain costs are payable from one party to another. These issues are typically included in a well drafted clause. It is important to note however, that a force majeure will not automatically prevent you from having to pay under the contract and similarly this does not negate the obligation of the other party having to make payments to you. Again, it is wise to seek legal advice before acting, as it is important to remember that a ‘standard’ force majeure clause rarely exists.

Frustration or Impossibility

If a contract you have entered into is silent on force majeure, there may also be an argument to suggest that COVID-19 has frustrated the contract. The doctrine of frustration excuses the party from performing the contract because is it physically or legally impossible to do so without breaching the agreement. Generally, we see fewer claims for frustration of the contract and typically you will not see anything on the face of the contract dealing with this. In these times however, who is to say that we will not be seeing more of these claims.

Where a contract becomes impossible to perform, the test is a strict one and only used in extreme circumstances. You need to demonstrate that the events in question were truly unforeseeable and that performance of the contract is objectively impossible, for example, because of the destruction of the subject matter of the contract.

Other performance related clauses in your contracts

Sometimes other contractual terms will be included in contracts such as whether time is of the essence allowing a party to rescind an agreement, delay claims in construction contracts, a good faith obligation to comply with all applicable laws and regulations, or a change of law relief and compensation clause. These should not be overlooked.

Before invoking such rights arising under contract it is wise not to consider these in isolation. It is important to be mindful of the wider impact such will have on your business elsewhere and also other contracts that you may have in place.

It is also advisable to check whether your business insurance will cover these issues. You should be looking closely at the wording of your policies to understand exactly what cover you have and whether you can bring an insurance claim for the impact that COVID-19 has had/ may still have on your business. Do speak to your broker or contact us at commercialdept@woodfines.co.uk if you are unsure.

-Claire Le Mouëllic