Coronavirus has interrupted domestic and international supply chains adversely, affecting the performance of contractual obligations.
Contractual issues currently facing businesses include whether you can suspend or terminate a contract because of the impact of COVID-19 and dealing with breaches by the other party to the contract.
It is important to know where you stand in relation to your existing or future contractual obligations before taking any precipitous action. Getting it wrong can expose you to a claim for damages.
Key issues to keep in mind
Each case will depend upon the terms of the contract and specific circumstances.
Typically, relevant issues include the following:
- Does the contract include a force majeure clause that responds to the circumstances?
- Has the contract been frustrated?
- Can you or the other party rely upon force majeure or frustration to terminate the contract?
- What are the consequences if you wrongly refuse to perform your contractual obligations or incorrectly terminate the contract?
- Can the other party take advantage of the wrongful refusal to perform or improperly terminate?
Force majeure refers to unforeseeable circumstances that arise, which prevents the performance of a contract.
The common law does not recognise the doctrine of force majeure and, so, it is up to the parties to expressly contract for it.
Commercial contracts commonly include force majeure clauses outlining the rights and remedies of the parties when certain extreme events occur outside of their control. Depending upon the express wording of the clause, a party may be able to rely upon the clause to justify delay, temporarily suspend the performance of the contract, or even to terminate.
Force majeure clauses are very important when it comes to the allocation of risk when an event, like a pandemic or epidemic occurs, due to its ability to significantly disrupt due performance.
Whether coronavirus will constitute a force majeure event will depend on the express terms of the contract, particularly the meaning attributed to ‘force majeure’ in the contract, as well as the specific circumstances.
Where the contract contains a force majeure clause, it is crucial to make sure that the clause covers the intervening event and that the event is materially relevant to the performance of your contractual obligations.
The party seeking to rely on the force majeure clause will bear the onus of proving that the force majeure event has occurred to the extent that performance is significantly delayed or altered (depending on the wording of the clause).
An attempt to trigger force majeure only to have the clause not cover, for example, COVID-19 and the performance of the contractual obligations, may constitute a repudiation of the contract by you, allowing the other party to terminate the contract and to claim damages.
Depending on the contractual obligations, the coronavirus may constitute an extraneous change of situation that has occurred through no fault of either party which ‘frustrates’ the contract; that is, it makes performance of the contract impossible or radically different.
Frustration can potentially operate where there is no express term, like a force majeure clause, in the contract to deal with the intervening event.
Where frustration occurs, it will discharge the parties from their future obligations; however, it will not discharge them for obligations accrued before the event in question.
Where the effect of COVID-19 defeats, for example, the fundamental commercial purpose underlying the contract, the agreement may be considered frustrated. However, contracts will typically not be frustrated where the contract simply becomes more onerous for one party. The fact that an event not contemplated by the parties also causes some delay in performance will not amount to frustration, unless that delay radically alters the performance of the contract. Essentially, courts will typically require that the contract be impossible to perform such that, in practice, frustration is rarely established.
Risks with termination
It is clear that there is legal uncertainty concerning the effect of coronavirus upon the performance of contractual obligations.
Each case will depend upon the terms of the contract and the individual circumstances.
It is crucial that you obtain legal advice before, for example, seeking to postpone or refusing to perform your contractual obligations.
If you wrongly refuse to perform your contractual obligations or incorrectly termiante the contract, the other side may take advantage of this and seek damages against you for wrongful repudiation. This could potentially occur even where the other party could not perform themselves or wanted to escape the contract for other commercial reasons.
Tackling these situations
It is important to do a proper legal analysis before seeking to terminate, based on COVID-19. This will avoid the risk of a wrongful termination, which could result in the other side having a claim against you for damages.
Conversely if a party seeks to terminate due to COVID-19 it is important to obtain legal advice regarding your rights.