Legal Matters Q&A: The Effect of Coronavirus on Contracts

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Nathanael Young, a specialist litigation and insolvency lawyer, answers questions about the effect of the coronavirus on contracts.

 

What effect has coronavirus had on contracts?

Over the last few weeks, the coronavirus outbreak has caused unprecedented disruption to most businesses. This has led to a huge increase in enquiries about the effect of the outbreak on contractual obligations. Some are finding contracts difficult or impossible to perform, while others are faced with arguments the other party can’t perform.

 

What happens if I can’t perform a contract?

In some cases, there will not be any issue. Some contracts allow a party to cancel without preconditions. It may suit both parties to cancel or reschedule. However, by default, contracts bind the parties until they are completed – or performed as lawyers say. Being unable to perform a contract will normally mean the other party has a claim against you for damages, even if it was not your fault.

 

What can excuse non-performance?

The legal concept of ‘frustration’ may stop a party being liable, but only if performing the contract has unexpectedly become either impossible, or radically different from what was envisaged. Frustration is all or nothing – if it applies, it results in the contract being discharged, so that no further performance is required. If it doesn’t, the normal rule applies.

 

Does frustration apply to my contract?

The rules on frustration may be displaced by the contract itself. Many written contracts include ‘force majeure’ clauses instead, which set out what happens when significant events occur outside the control of the parties. These often involve suspension at first, followed by complete cancellation if the suspension lasts long enough, so in some cases they can give a very different outcome.

 

Can I rely on force majeure?

Force majeure doesn’t apply by default; it only applies if a clause to that effect appears in your contract. Even if it does, it is crucial to check whether and when the rights under that clause can be triggered, the effect that will have, and whether any special notices or conditions are required. Not all clauses give the same rights.

 

If there’s no force majeure clause, is my contract frustrated?

Frustration doesn’t require a specific clause or even a written contract. The coronavirus outbreak has also led to many unexpected events. However, frustration is very fact-specific; it depends on analysing what performance is required and what effect events have had on that performance. As frustration has such drastic consequences, it does not apply just because the contract has become more difficult to perform or there is likely to be a delay in performance.

 

What happens if we have started to perform a contract and it is frustrated?

Not all contracts are the same, but the general rule is that money paid before the frustrating event has to be repaid, 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.

 

Published in Hertfordshire Chamber of Commerce Inspire magazine, issue 38, May-June 2020.

If you have an issue with a contract and need advice, please contact Nat Young in 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.