The unprecedented nature of the coronavirus pandemic has undoubtedly caused, or is likely to cause, disruption to businesses in a wide variety of sectors. Many businesses will need to look at their existing contractual relationships and assess whether or not there are any steps that can be taken to minimise their outgoings in the short to medium term.
What clauses should you be looking for?
Temporary Suspension of Contractual Obligations
The relevant clause to look for in a contract is known as a ‘force majeure’ clause. A force majeure clause provides the right for a party or both parties to temporarily suspend performance of their contractual obligations on the occurrence of certain defined events which are wholly outside of the control of both parties. A force majeure clause operates so as to suspend all obligations under the contract for the duration of the intervening event without liability, with normal contractual obligations resuming once the event ceases.
There can be no implied force majeure clause in a contract. It will only exist if the parties agreed at the time of entering into the contract for an express clause to be written in.
The extent of the clause and whether it will apply in circumstances like the coronavirus pandemic is very fact-specific. It will require careful consideration of the exact wording of the clause and the circumstances that it covers, by reference to the exact words used by the parties and not the parties’ general intention.
The burden of proof will be on the party seeking to rely on the clause to show that the event falls within it, and that the clause has been triggered by the event.
Interpreting the Clause
Does the coronavirus fall within the list of specified events in my contract?
Of course, no one could have predicted the coronavirus pandemic and so it would certainly not be a defined event in the clause. It will, therefore, come down to whether the wording and list of events the clause envisages can be interpreted as covering this sort of scenario.
In contract law, there is a rule of construction known as ‘expressio unius est exclusio alterius’, meaning that the expression of one thing is to the exclusion of another. It is therefore important to consider whether the event falls within the scope of one of the defined events (e.g. disease, pandemic or epidemic), or whether there is any sweep up language that may ensure the list is not treated as a defined list of events, and could be interpreted more widely.
In contract law, words of a general nature may also be considered to be qualified by the categories in the same clause. However, in considering this, the court will have regard to what the parties intended and will usually give general words their wider and natural meaning where possible in relation to commercial contracts.
A reference to suspend a contract in the case of a ‘force majeure event’ without any definition as to what is intended by the parties to be included as a ‘force majeure event’ is unlikely to be sufficient and likely to be void for uncertainty.
If the coronavirus does fall within the list of specified events, has the clause been triggered?
Some force majeure clauses will be drafted to apply only in the event that an intervening event makes it impossible for an affected party to perform their duties. Others may be more widely drafted and may come into effect in the event that an event hinders or delays performance. Again, it will come down to the wording of the clause.
The fact that coronavirus will make it harder to comply with contractual obligations, or that it will make it less financially viable, will not in itself be sufficient to satisfy that it is ‘impossible’ to perform the obligations or that a party is ‘prevented’ from performing their obligations. This is because such obligations can still technically be performed despite the coronavirus. It must be established that performance is legally or physically impossible if this wording is used.
However, in light of the recent government guidelines on social distancing, if this results in the parties’ obligations becoming absolutely impossible to perform as opposed to commercially unviable, it will be a question of whether or not either party is capable of still performing the fundamental terms of the contract. If not, whether that is an event beyond either parties’ control and whether coronavirus is an event covered by the defined terms of the force majeure clause.
If the clause is triggered where performance is hindered or delayed, this will have a wider scope and will generally be satisfied if performance is substantially more onerous. However, an increase in cost of performance is still unlikely to be enough to trigger a clause with this wording.
How Do I Notify?
In the event that a force majeure event has occurred and there is a force majeure clause in the contract, it is necessary for the parties to consider the notification requirements and follow the procedures set out in the contract to notify the other party of their intention to rely on the clause. In the event that a party fails to do so, they could be held in breach of contract if they suspend without following the correct procedures.
It is likely that the party seeking to rely on the clause will also need to show that they have taken all reasonable steps to mitigate the effect of the event on performance in so far as possible before seeking to rely on the clause.
What Happens If I Get It Wrong?
If there is any doubt as to whether the force majeure clause has been triggered or applies in the circumstances, then specialist legal advice should be obtained with reference to your contractual wording and the specific circumstances affecting your business. If it does not apply, and you unlawfully suspend, you could be in breach of contract and liable for the losses arising from the suspension.
The above is intended as general guidance only and should not be used as a substitute for legal advice specifically tailored to your contract and your circumstances.
What If I Don’t Have a Clause?
In the absence of a force majeure clause, you have no right to seek to assert a force majeure event and suspend the contract.
However, this does not mean that it is not open to the parties to try to reach some commercial compromise. After all, following the pandemic, it is likely that both parties will want to resume their commercial relationship. If the parties decide to negotiate a temporary suspension of the contract in the absence of a force majeure clause, they should engage in negotiations on what is known as a ‘without prejudice basis’ (in other words – off the record) to preserve their position and not to prejudice themselves.
Termination of the Contract
In the event that you do not consider that a suspension of the contract will suffice, or there is no force majeure clause, it will be necessary to consider your exposure to liability under the contract in the event of it being terminated.
Firstly, you should consider whether you have any termination provisions in your contract that will allow you to terminate the contract upon notice, and whether those termination provisions can be complied with.
If you do not have the right to terminate the contract upon notice or you need to terminate the contract before the notice period allows, if you terminate you would be in breach of contract and would be liable for any losses arising from such early termination. It is advisable that you seek to quantify such losses, so that you are fully aware of your exposure vs your continued obligations (e.g. payment) during the coronavirus period in order to make an informed decision.
It is also advisable to consider whether or not you have entered into any security or personal guarantee in relation to the sums owed under the contract which could expose you personally or a parent company to liability.
Has the Contract Been Frustrated?
A contract can be discharged on the grounds of frustration, without liability for termination, in limited circumstances. If the contract is physically or commercially impossible to fulfil or the obligations are so radically different from that envisaged by the parties at the time they entered into the contract, it can render the contract incapable of being performed.
In the event that a contract is frustrated, any future obligations for payment will be discharged and this will provide a defence to liability for breach of contract.
Frustration is very hard to establish and will apply only in very limited circumstances. It must be impossible (and as above with force majeure) not simply commercially unviable or more difficult to perform. This is a high burden to discharge. Given the unprecedented nature of coronavirus, it is not clear cut whether or not frustration would provide a remedy in this situation. The consequences of getting it wrong are the same as for a force majeure and you could be liable for breach of contract if you terminate unlawfully and are unable to establish frustration. Therefore, specialist advice should be sought before taking steps to terminate and seeking to rely on frustration.
Insurance
It may be worth considering whether or not you hold any insurance that would cover non-performance due to an unforeseen event like the coronavirus pandemic. Again, this will depend on the wording of your policy and it is advisable to contact your insurer for advice before taking any steps to terminate or suspend the contract.
Conclusion
Your position will depend very heavily on the circumstances and facts in relation to your contract. If you find yourself in this situation and require advice, please our Commercial and Property Litigation Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.