Coronavirus – How to avoid a claim for breaches of contract: termination, force majeure and frustration
In the current crisis, we are seeing many businesses, often through no fault of their own, struggling to comply with their contractual obligations and if this happens they may face significant claims for damages or costly litigation.
It is possible, however, in certain circumstances to find relief for breaches either in the contract itself or through the operation of the law of frustration.
My business is struggling to comply with its contractual obligations – what are my options?
Our advice is to check your contracts carefully. There are generally three potential situations that could help.
General termination clauses
Contracts often allow either or both party to terminate a contract, but this is usually restricted to certain circumstances.
There may be general no fault termination clauses which enable one or more of the parties to terminate the contract regardless of whether or not there has been a breach of the contract. To ensure termination is effective, it is very important to follow the procedure set out in the contract. Failure to do so could lead to a dispute as to whether termination has in fact taken place.
Where there has been a breach it is important to remember that not all breaches entitle a party to terminate a contract and so it is vital to check the wording of any termination clause carefully before seeking to terminate (otherwise the purported termination may itself be a breach which can lead to claims).
Force majeure clauses
If a party’s ability to comply with a contract is affected due to coronavirus, this may be covered by a force majeure clause in the contract. The effect of a force majeure clause is that in certain circumstances only, where an extraordinary event outside of a party’s control prevents, stops or delays it from being able to comply with its contractual obligations, it may suspend these obligations and/or terminate the contract. Typical examples include floods, droughts, earthquakes, terrorism, wars, plagues etc.
If a contract does contain a force majeure clause, its wording will need to be considered carefully to see whether or not it covers coronavirus (it may for example refer to “epidemics or pandemics”).
If a contract does contain such a clause, it does not automatically allow a party to suspend performance of its obligations and/or terminate the contract. It depends on the circumstances of each matter and party will also have to show that it has not just become more difficult or unprofitable to perform their obligations but that coronavirus and or the lockdown has had a significant impact on their ability to comply with their obligations.
Law of Frustration
If your contract does not contain a force majeure clause, the law of frustration may assist. However it is harder to rely on than force majeure.
Frustration comes into play where an event that was unforeseen at the time the contract was entered into makes compliance with a contract impossible or transforms the obligation to perform into a totally different obligation from that which the party originally signed up to. It is therefore important to consider when the contract was entered into and what could reasonably have been foreseen at that time.
It is also important to note that frustration will not apply where compliance with the contractual obligations is still possible but has just become more difficult or costly. If applied, it allows the contract to be automatically terminated and current and future contractual obligations fall away (but importantly not responsibility for past obligations). Unlike force majeure, it does not allow for suspension.
How can my business best prepare to avoid breaches or potential litigation?
Businesses will be in a position to recognise if they are currently or likely to struggle in future to comply with any contractual obligations due to coronavirus. Businesses should also be taking all reasonable steps to comply with their obligations as a failure to do may affect their ability to rely on force majeure or frustration.
It is vitally important to check contracts now to see what they say about suspending the performance of obligations under the contract and/or terminating the contract altogether. Some contracts will contain reporting requirements which will require a party to notify other parties where a force majeure event impacts the contract.
Also remember that the other contracting party may also be struggling and may welcome a suspension or termination by agreement.
Ultimately, businesses should consider their position and their options to safeguard themselves from potential claims. This is not a straightforward area and can prove costly if a business gets it wrong.
For advice or guidance on any other legal issue, a member of our team can help – please click here to discuss.