Coronavirus and contracts

The consequences of Coronavirus are many and varied, including impacting existing commercial contracts.

This article focuses on the position where Coronavirus affects a party’s ability to perform their obligations under a contract, particularly where the contract does not include a specific force majeure clause.

‘Force majeure’ clauses are included within contracts to limit liability where an event, outside your contemplation and control, means that you are unable to perform your obligations under the contract. Force majeure clauses specify the type of events that could delay or terminate the contract.

Coronavirus may fall within the description of a ‘force majeure’ event, which will enable parties to rely on these particular clauses when they can no longer perform their obligations under the contract. But what if your contract does not include a force majeure clause, or you had a verbal contract?

Firstly, it is important to remember that contracts can be established at law without a written agreement, provided that there is (1) an offer (2) an acceptance of that offer (3) consideration and (4) intention for the contract to be legally binding.

If there is no force majeure clause in your agreement, you will have to rely upon the common law of frustration in the event of a breach of your obligations under the contract. This applies to all contracts, both verbal and written.

Frustration can be established where there is an event that (1) occurs after the contract was formed (2) was not reasonably contemplated by the parties at the time of executing the contract (3) is not the fault of either party and (4) renders performance of the contract impossible, illegal or radically different. In other words, the circumstances within which the contract is performed must have changed radically.

If Coronavirus is having a negative impact on the performance of your contract, for example if your supply chains have been cut off or you can no longer travel to perform your services, it may constitute frustration. Whether frustration (or any another basis for terminating contractual obligations) can be established depends on the terms of your agreement and the effect upon the specific obligations (of both you and other parties). The options available under the agreement should be considered carefully before action is taken in order to minimise potential liability for wrongful termination of the contract.

If frustration occurs the contract is automatically brought to an end, meaning that the parties are discharged from any future obligations.

The Law Reform (Frustrated Contracts) Act 1943 (“LRA”) applies to the majority of commercial contracts that are governed by English Law (unless excluded by the terms of the specific contract). Under the LRA you could be entitled to retrieve money paid or expenses incurred before the frustrating event, as well as discharge any future payments that you owe under the contract.

If the LRA does not apply to your contract, you will need to rely on the common law rules on frustration. Frustration does not mean that the contract is ‘undone’ to place the parties back to their original positions, but rather that the contract ends on the current position: in other words “loss lies where it falls”.

If you require any legal advice in this area please contact us.

This article has been co-written by Chris Potts and Abbie Coleman.