Remedies if Coronavirus prevents the performance of Services

Andrew Bradley takes a look at liability for failure to perform contracts in the light of the Coronavirus pandemic.

If you would like further advice on this note, please feel free to call us on 01905 900 939 or email to welcome@bradleyhayneslaw.co.uk.

Supply chain and commercial risk in the event of a pandemic or crisis

As a result of a pandemic or crisis, businesses may either be unable to fulfil their contractual obligations or suffer loss because suppliers cannot fulfil theirs. Under normal circumstances, a claim for damages for breach of contract would be a possible remedy.

However, if it is clear that the contractual failure was principally caused by an outbreak of disease or other crisis, a claim for breach may not be viable for the following reasons:

• There is an applicable force majeure clause in the relevant contract
• The doctrine of frustration applies

Businesses should therefore review their key contracts if they think there is any risk that an outbreak of disease or crisis situation could cause a breach, to assess what pre-emptive measures they could take to avoid this including stock-piling key materials or resources, or providing early delivery to customers where possible.

You should also consider implementing a communication plan (even simply as part of the what-if business continuity planning) to engage with the counterparties of these key contracts in the event of a pandemic or crisis both from the early stages and throughout the affected period.

Force majeure clauses in the event of a pandemic or crisis

A force majeure clause typically excuses one (or both) parties from performance of the contract in some way following the occurrence of certain events and its scope varies from agreement to agreement.

The first issue to check is whether a pandemic or crisis is covered by the definition of force majeure in the relevant contract. If the definition includes events beyond a party’s reasonable control, this may be sufficient but will not be guaranteed to succeed and will depend on the drafting, circumstances, intention of the parties and the extent to which this can be proved.

The second issue to check is how the force majeure clause operates. If it provides that the relevant triggering event must “prevent” performance, the relevant party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. By contrast, the words “hinder” and “delay” have a wider scope, and will generally be satisfied if performance is substantially more onerous. A mere increase in the cost of performing the contract, however, would still be unlikely to be enough to trigger a clause with wording of this kind. In addition, the affected party must also show that it has taken all reasonable steps to avoid or mitigate the event and its effect on the party’s contractual performance.

When drafting a force majeure clause for a new contract, businesses should consider adding pandemics, epidemics and other crisis situations to the list of force majeure events. Businesses should consider amending their standard terms of business to make sure that their force majeure clauses cover pandemic situations and crises.  This is just one of many reasons that terms of business are so critical.

Frustration of contracts in the event of a pandemic or crisis

The doctrine of frustration applies where a significant change of circumstances renders performance of a contract radically different from the obligations that were originally undertaken. Such a change in circumstances must be due to an outside event or change of situation that occurs without the fault of the party seeking to rely on it.

The courts are typically reluctant to find that a contract has been frustrated. Express provision in the contract for the event in question (such as a force majeure clause) will normally prevent the contract being frustrated. However, a contract will not be frustrated simply because it becomes more difficult or more expensive to perform or because the business has been let down by another supplier.

When a frustrating event occurs, the parties are excused from further performance and are not liable for damages for non-performance. However, the contract will be permanently frustrated: temporary frustration (in the sense of temporary suspension) of the contract is not recognised. The courts cannot amend the terms of the contract to reflect the effects of the supervening event.