Can you terminate a business contract due to the Covid-19 outbreak?

Can you terminate a business contract due to the Covid-19 outbreak?

As the pandemic continues to cause havoc in all aspects of commercial life, we are regularly being asked to advise in respect of whether a party can suspend or terminate a business contract due to the impact of the pandemic.

Each contract and set of circumstances will be different.

Each case will depend upon the terms of the contract and the exact circumstances that apply to each of the parties. Parties, are likely to be asking the following questions:

1. Has performance of the contract been frustrated?

2. Does the contract include a force majeure clause that is applicable to the parties’ circumstances?

3. Are the parties able to rely upon frustration or force majeure to end their contractual obligations?

4. Is one or another party seeking to take advantage of the current situation in order to merely renegotiate the current terms?

5. What are the penalties and remedies available if a party refuses to perform a contractual obligation?

Frustration

The doctrine of Frustration applies when performance of a contract is impossible or completely different to that originally envisaged by the contracting parties.

Frustration can apply when there is no express term in the contract.  If a contract is frustrated it is, without further notice, cancelled.

Where frustration does apply the parties to the contract will be discharged from their future and ongoing obligations. However, frustration will not discharge the parties from their obligations before the occurrence of the frustrating event.

Frustration is rarely successfully proven in the courts. Typically, the law requires that a contract becomes impossible to perform. Contracts will not be frustrated where it simply becomes more difficult for one party.  However, where the pandemic alters the fundamental commercial purpose then frustration may apply.

Force Majeure

Force Majeure clauses are common within commercial contracts and usually set out the rights and remedies of the parties when extreme events occur outside of their control.

They must be expressly provided for in a contract.  Each clause will be different and may delay, suspend or end performance of a party’s obligation under contract.

Generally, they make provision for where an unforeseeable circumstance arises which prevents the performance of a contract.  Disease, epidemics and/or pandemics may be specifically listed.  If not, consideration must be given as to whether the pandemic constitutes an act of State or Government.  Whether or not a pandemic is an Act of God has yet to be considered before the courts.

Whether the pandemic will constitute a force majeure event will depend on the express wording of the clause and the specific circumstances.  

The risks with termination

Each case will depend upon the terms of the contract and the specific circumstances.

It is important that legal advice is obtained before a party seeks to suspend, delay or refuse to perform contractual obligations.

Triggering a force majeure clause or incorrectly cancelling a contract based upon the doctrine of frustration, when the circumstances do not permit, may constitute a repudiation of contract and may allow the other party to accept your repudiation in termination of the contract and claim damages.  Accordingly, be careful and take advice before either refusing to perform contractual obligations or incorrectly terminating a contract.

For further information please contact:

Bill Dhariwal, Managing Director, DDI: 01489 864 117, E: bill.dhariwal@lawcomm.co.uk or;

Neil Woolgar, Head of Commercial Law, DDI: 01489 864 133, E: neil.woolgar@lawcomm.co.uk.

Please note: The above article was written on 30 March 2020 and does not constitute legal advice.