COVID-19: Force Majeure and Frustration of Contract

September 21, 2020 10:52 am

force majeure and frustration of contract

The Coronavirus (COVID-19) virus has continued to impact on many businesses and that of  day to day life, and whilst we have started to see some return to normal, the Government is still introducing restrictions and regulations (as set out in the Coronavirus Act 2020) on an ad-hoc basis which could cause disruption to many businesses’ ability to perform their contractual obligations. In this instance, some businesses may look to rely on a force majeure clause to excuse parties from performing their obligations or from doing so on time, without incurring liability for non-performance.

What is a force majeure clause?

In its very basic form, force majeure are clauses within a contract which can revise the parties’ obligations and/or liabilities when unforeseeable circumstances or an event that was beyond their control prevents one or all parties from fulfilling those obligations within the contract. The “test” for force majeure usually requires the satisfaction of three main factors:

 

  • the event must be beyond the reasonable control of the affected party;
  • the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
  • the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

However, if a business affected by the current coronavirus pandemic is unable to fulfil their obligations and their contract does not include a force majeure clause or a force majeure clause that does not cover an event such as a pandemic, then that business may wish to consider the contract as being frustrated, and may be able to rely upon the ‘doctrine of frustration’.

What is the doctrine of frustration?

If subsequent to its formation, and without fault of either party, a contract is incapable of being performed due to an unforeseen event (or events), which results in further performance of the contract impossible, illegal or something being radically different from those contemplated by the parties to the contract, it is possible a contract will be discharged by frustration. When a contract is successfully found to be frustrated, it will result in the contract automatically coming to an end. The parties to the contract will no longer be bound to perform their outstanding obligations and no breach of contract claims can be brought against the non-performing party.  The type of events that the Coronavirus pandemic may impact on and may frustrate a contract include; forced quarantine areas, travel bans, illness and death, and changes in legislation.

However, to successfully rely on a frustration of contract there will be several factors that must be demonstrated and it is dependent on the parties having not made provision for a specific set of circumstances in the contract, such as the occurrence of the event that is alleged to have caused the frustration of contract.

Furthermore, it cannot be invoked by a party wanting to exit purely down to the task becoming more difficult or more expensive to perform.

Contracts and Contract Dispute Resolution

The laws surrounding force majeure and the doctrine of frustration can be highly complex and whilst the Coronavirus pandemic may constitute as an event of force majeure under the terms of the contract or be found to frustrate a contract, it is not a factor that should be relied on and will need to be determined on a case by case basis.

Careful interpretation of a contract is required in order to determine a party’s obligations and a business should carefully consider whether any of its contractual obligations could be affected by the COVID-19 pandemic, and to what extent.

Larcomes’ team of specialist commercial solicitors have the breadth and depth of experience necessary to deal with all kinds of complex commercial and regulatory matters and commercial litigation. As well as litigation, the team has considerable experience of many other dispute resolution mechanisms, including arbitration, adjudication and alternative dispute resolution.

We can also assist businesses with reviewing and drafting robust contracts and agreements that protect the best interests of the business and their owners.

If your business would like some advice on any of the matters raised in this article or if you a facing a contract dispute, you can call today on 023 9244 8100 to speak with one of our specialist business lawyers about your business needs.

Please note that this article is not intended as legal or professional advice, it is for general guidance only and updates to the law may have changed since it was published.


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