Coronavirus survival guide, part one: Contracts
Wednesday, May 13, 2020
As Covid-19 continues to force the world into isolation, Printweek examines three key issues for management and finds advice on how to mitigate the impact of coronavirus. Part one is on removing risk from contracts.
John Warchus, a partner at Moore Blatch, has seen coronavirus increase concerns over the ability of parties to carry out agreed contracts. In particular, he says that “the coronavirus outbreak is an illustration of the legal principles of force majeure and frustration and how contracts can be suspended or ended because of an exceptional outside event”.
Both are powerful concepts, but Warchus says they operate quite differently. The first thing to note is that under English law, force majeure only applies where there is an express clause in a contract.
“In essence,” he says, “a party relying on it will need to demonstrate that a force majeure event has occurred which is beyond its reasonable control; that the event has prevented, hindered or delayed the performance of the contract; and it has taken all reasonable steps to avoid or mitigate the force majeure event.”
This means looking to the wording of the contract and understanding that where coronavirus is accepted as a qualifying force majeure event, contractual obligations will only be lifted for as long as the event remains in place. Warchus knows from experience that “the courts will interpret any clause strictly and the burden of proof will be on the party claiming force majeure to demonstrate that it has arisen and is the sole cause of delay or non-performance”.
He adds that “if force majeure is one of several reasons, it will not apply”. And this must be demonstrable. Further, and this should be obvious, force majeure must be notified according to the contract terms for it to apply.
As to the legal effects of force majeure, Warchus says the wording is key, but generally liability is removed for as long as the event remains in place – “the effect is only temporary, and the affected party will need to resume their obligations as soon as the force majeure event has passed”.
At the same time, Warchus points out that a well-drafted force majeure clause will have a provision that allows the contract to be terminated without liability if the force majeure continues in place for a defined period: “Such a clause ensures that the party not affected is not tied into a very long contract where the other party cannot perform its obligations for a significant time.”
But what if there is no force majeure clause? Here Warchus says that then the only way an affected party can avoid legal liability is through the legal concept of frustration which, he says, “requires them to show that it is either physically or commercially impossible to perform a contract due to an interrupting event”.
The problem is that legal test for frustration is far stricter than that for force majeure as it requires a party to show that it is impossible to perform a contract or that the obligations have become radically different. The legal effects are, according to Warchus, dramatic as frustration can automatically terminate a contract for good.
Case law here is muddied and the courts in recent years have, reckons Warchus, said that obligations need to become “radically different” after the event for frustration to apply.
Lastly, Warchus explains that to determine if a contract has been frustrated, a court will have to assess the terms of the contract; the factual background to the contract; the parties’ knowledge and expectations about risk; and the parties’ view as to the ability to perform the contract in circumstances that are now said to amount to frustration.
It’s true – there is much doom and gloom around, but sight shouldn’t be lost of the fact that the sky hasn’t fallen, the world hasn’t ended, and society will surely get through the coronavirus outbreak. But it’s going to take – and this is an understatement – some managing and time. Keep calm and try to carry on.
For the other articles in this series, click below:
Coronavirus survival guide part two: Employment matters
Coronavirus survival guide part three: Insurance