Coronavirus and Contracts
You very likely aren’t sat at home worrying, fretting, festering over all the contractual obligations that won’t be fulfilled because of coronavirus. You probably aren’t aware or don’t care – I don’t blame you. For the many, contract law probably seems a very dull subject. But it might in the past few weeks have reared its head. This piece is for the very few of you out there that do wonder what happens when Mother Nature strikes her hand against the toils of the Earth and makes it IMPOSSIBLE to carry out something you have promised or have been promised: to take that flight to Istanbul and begin the next stage of your big textiles deal; or, maybe you are a QS and your construction project has been indefinitely ground to a halt; or, that sunny trip to Gran Canaria, scheduled for April, paid and promised long ago when Winter blues had really dragged you down, is suddenly cancelled with no option in sight but to forgo the expense.
There is an explanation for all of this – what happens and why, what you might be able to do about it all – and that explanation is a legal one. The often quiet, but ever-present hand of civil law grabs at the slightest sign of chaos and attempts to restore the world to normality in some way.
What happens when a contract is impossible to perform or performance of the contract will be radically different due to some unforeseen, tumultuous event?
If there is no provision (known as a ‘force majeure’ clause, to be discussed below) attempting to relieve the burden of the freak-of-nature, performance-curtailing, frustrating event, then all future contractual obligations will be brought to an end and each party may well be left with whatever misshapen, half-spun debts that they incurred. Quite simply, when the Act of God strikes, leaving you with half a ton of red facing bricks that can no longer be delivered to a furloughed construction workforce, you simply need not deliver them and instead face the lost sale price you would have received. This is known as discharge by frustration.
Further to this, had you already received payment for the bricks, this payment could now become recoverable for the contractors to grab under s1(2) of the Law Reform (Frustrated Contracts) Act 1943. Or perhaps, if you were particularly generous, having delivered them before payment was due – would you see any money for keeping up your end of the bargain? Fortunately, s1(3) will recognise the valuable benefit your customer has received. It will be the court’s discretion to award you a fee up to the value of that benefit.
Balance will be restored.
Alternatively, is there some way of planning for such a situation in advance? How might the ensuing chaotic discussions between two contracting parties be mitigated in the first place? With a clause – a force majeure clause.
When a world-spinning pandemic hits, a carefully worded clause in your original contract will allow suitable variations to deal with such a crisis. Perhaps an extension is permitted, allowing you to offload your bricks the minute the workforce returns to work? Or maybe, it will trigger early termination?
To have a good Covid-19 force majeure clause, you will need to prove: the clause covers the situation (i.e. coronavirus, pandemics etc.); that corona has affected your performance in the specified way; that the circumstances were beyond your control; and, show that you have taken all reasonable steps to mitigate the event.