Coronavirus – Contracted and Confused? How to uphold contractual obligations

Patrick Tedstone, Commercial Litigation Specialist

By Patrick Tedstone

The outbreak of coronavirus in the UK is predicted to have a profound impact on the way in which society functions for the foreseeable future.

With its potential to have a debilitating effect on the UK workforce and the most recent government advice recommending that people to work from home where possible, many businesses will be unsure of their position. 

Potential disruption to supply chains and a significant reduction in the number of available employees could mean that businesses are unable to meet obligations within their existing contracts.

Under English law, contracts that involve ongoing performance on the part of one or more of the parties are known as ‘absolute contracts.’

This means that parties are expected to continually perform their contractual obligations and if they fail to do so, this could give rise to a cause of action for breach of contract.

There are two contractual principles which businesses may need to rely upon in the forthcoming weeks to avoid such a scenario. These are force majeure and frustration.

Force majeure 

Force majeure will generally, in written contracts, have its own dedicated clause in which specified scenarios and events will allow the parties to modify their obligations.  

For the purposes of the current epidemic, the key consideration will be whether coronavirus can be captured by the force majeure wording.

Force majeure clauses will often define events such as government interference, national emergencies and in some contracts pandemics/epidemics as those which neither party could have foreseen when entering into the agreement.

Where a force majeure event has been established, the contract will usually provide that the parties can vary their position; which can include suspension, termination, non-liability etc.

Additionally, some clauses will provide a duty to mitigate, so businesses will have to take caution and ensure it has done all that it can to limit the impact of the outbreak if it intends to rely on a force majeure clause.

As the drafting of each individual force majeure clause differs from contract to contract, it will be necessary for businesses to consider the precise wording of the term to establish its rights and obligations.

Frustration

Where the option of relying on a force majeure clause is not available, businesses may have recourse to the common law principle of frustration.

Frustration provides that where circumstances render it physically or commercially impossible for a party to perform its obligations under a contract, it may be discharged from its obligations.

If for example, certain contracts can only be performed in certain areas of the country and the coronavirus epidemic places that area on lockdown, the frustration could be invoked.

If frustration applies, then the contract immediately comes to an end and all future obligations under it, are discharged.

Neither party will be able to claim damages for non-performance and a party that received a benefit prior to the frustration event, may be required by the courts to pay for it.

More information

With the potential implications the coronavirus epidemic poses, it is crucial that businesses are aware of their contractual rights and obligations.

Should you wish to discuss your position in light further to the content of this article, please contact one of our partners Patrick Tedstone, Mike Smyth or Lorraine Smith, on 01785 223 440.

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