A World at War: Contracts and Coronavirus

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By Nat Young, Senior Solicitor specialising in Insolvency and Dispute Resolution

As one government after another has recently reminded us, the world is now ‘at war’ with the COVID-19 virus. This war has not only caused loss of life; it has also caused unthinkable disruption around the world. Workers are trapped at home, borders are closed, supplies disrupted. Some businesses have already collapsed; few have escaped significant challenges.

Not many people in business today would have seen anything similar, but it would be wrong to say it is completely unprecedented. Back in 1939, a Polish textile firm called Fibrosa Spolka Ackyjna had just ordered some expensive machinery from England when literal war broke out, and delivery of the machinery became impossible.

Its claim to recover the deposit it had paid not only ended up being successful in the highest court in the land, it also led to Parliament taking action. Conscious that similar disruption had been faced by many businesses – and despite the war still being in the balance – it found time to pass the Law Reform (Frustrated Contracts) Act 1943 to build on and improve the court’s judgment.

That Act is still in force, and the legal concept of ‘frustration’ has once again become particularly important. Frustration occurs when performing a contract has unexpectedly become either impossible, or radically different from what was envisaged. When a contract is frustrated, it will be discharged, so that no further performance is required.

That is simple enough if neither party has started to perform the contract. The Act, which applies to most contracts, sets out what happens if they have. It provides that money paid before the frustrating event can be recovered, while money due beforehand ceases to be payable. However, a party that has incurred expenses can hold back or recover a sum for those expenses to the extent the court considers that just. Likewise, the court can require a party who has already gained a valuable benefit under the contract to pay an appropriate sum for that benefit. In those cases, it can be important to work out precisely when the frustrating event occurred.

However, contractual clauses can displace the rules on frustration. Many written contracts include ‘force majeure’ clauses, which set out what happens when significant events occur outside the control of the parties. As force majeure clauses only apply to the extent set out in the contract, it is crucial to check contracts to see whether they can be triggered and the effect that they will have, as well as to ensure whether any notices are required.

Usually force majeure clauses allow a party to serve notice to suspend performance under the contract when a trigger event occurs, rather than providing that the contract is discharged straight away. If the suspension is for a long enough time, the other party is normally then given a right to terminate. That means force majeure clauses often cover severe but temporary events, which might still allow performance at a later date. However, as with frustration, force majeure clauses will not apply just because performing the contract has become more difficult.

If your contracts have been disrupted as a result of the coronavirus, the first step is therefore to look at any written contractual terms. If there is a force majeure clause, you will need to check if it applies, and what you need to do to comply with it. If not, you then need to consider if the contract has been frustrated. If it has been, it may seem appropriate that a law passed in wartime sets out your rights.

For further advice about contracts and coronavirus please contact our Dispute Resolution team

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.