Coronavirus and Contractual Considerations
Updated: Jul 3, 2020
During the COVID-19 pandemic, businesses should carefully consider their contracts and obligations. Where a party is unable to fulfil a contract for the supply of goods and/or services exclusively due to the effect of the coronavirus, there are two main ways to discharge the contract: force majeure and frustration.
What is force majeure?
Force Majeure is a term that describes an event beyond the control of the parties and which ultimately prevents them from fulfilling their contractual obligations or makes fulfilling the contract impossible.
Parties should check to see whether the contract contains a force majeure provision. This may often be worded differently - for example, a description of an ‘exceptional event’ would be such a provision. It would be advisable to check whether this extends to such an event like a pandemic or whether the clause allows the inference of such an event – some clauses may be wide and reference any event beyond the reasonable control of the parties. It cannot be assumed that such provisions will necessarily be triggered by coronavirus. This will very much depend not only on the wording of the provision, but also on the effect which coronavirus may have on a party’s performance.
Parties should consider:
Is force majeure a defined term within the contract?
Are there any examples provided in the contract such as epidemic, pandemic or Government sanctions?
What is the effect of coronavirus on performance?
What steps have been taken to mitigate the effect?
Be aware of notice provision and deadlines.
Keep detailed records and other evidence in case they are needed later to establish the effect of force majeure events.
Parties will need to consider whether the completion of contract has been completely prevented or has been simply made more inconvenient or expensive. If it is either of the latter then it may not be enough to discharge the contract. A force majeure clause may also stipulate what is to happen in such an event, whether that be a pause, a right to terminate after a certain time, a right to vary the contract or automatic termination. Any clause may also state what will happen in respect of payments both past and future.
What is frustration?
If a contract does not include an express force majeure clause, it may be considered frustrated. Contract frustration occurs when it becomes impossible to perform and therefore cannot be completed.
This can often be a high threshold to meet because performance of the contract must be rendered impossible rather than difficult or expensive to rectify. If a contract is frustrated, it will immediately be terminated, and both parties released from their future obligations. The goods or services would not be provided, and future payment would not be required. Frustration would not affect the requirement to pay for work done to date.
Where there has been payment up front for work not yet carried out, or perhaps partially carried out, or a deposit has been paid, these sums should be refunded, minus reasonable costs incurred or work done.
One of the key instances in which frustration may occur is when a contract becomes illegal to perform. In the case of coronavirus, it could be argued that because the Government has banned certain actions, it therefore becomes illegal and impossible to fulfil the contract. If this is accepted, any obligations under the original contract cease and the work to date is paid for, before both parties go their separate ways.
What are the first steps to checking whether my contract cannot be fulfilled?
Firstly, check whether your contract has a specific force majeure event clause. In the case of coronavirus, many contracts are unable to be fulfilled due to the Government’s strict guidelines.
If your contract does have such a clause and you are no longer able to fulfil the contract due to the Government guidance, the next thing to establish is what happens when either you or the client cancels. The repercussions of these two circumstances may not necessarily be the same and it is important that you check whether there is a difference. Ideally, the clause in the contract would state what will happen to sums already paid or future sums due.
Can I just change the terms of the original contract?
If your contract does not state what would happen in the event that you cannot fulfil your duties, or if you do not wish to lose the business, then you may need to attempt to come to some form of commercial arrangement that suits both you and the other party. It may also be useful to consider taking a commercial view with regards to refunds or putting a pause on the contract, which would enable your business to keep a good reputation.
The parties are free to make variations, for example:
agreeing to delay performance of the contract and payments;
agreeing for tenants to defer rent;
perhaps to pause for 3 months and add 3 months onto the end of the existing contract term.
Any such agreement should be made clearly in writing and where there is reference to delays in payment, the timescale should be set out, perhaps with an agreed review date. The existing contract should be checked to confirm whether there are any procedural requirements for variations to be made; for example, it may state it must be in writing and signed by directors.
When is it appropriate to vary a contract?
Contracts may need to be varied for various reasons, such as:
An extension of time is required.
Changes in resources required to perform the contract.
Changes in the scope of goods or services required.
Changes in the contract charges or rates.
Clarification of issues which the original contract has not adequately dealt with.
Other changes to the underlying needs of either party.
When considering Government actions and guidance in relation to coronavirus, there are many contracts that are unable to be fulfilled as usual. In the circumstances, it may be a good idea to consider whether you can agree with the other party to pause or vary the contract until it can be resumed as normal.
A variation to the current contract may not be the most appropriate answer, as many variations have an effect on cost, time or quality. However, it can be an appropriate way to pause or reduce services which cannot currently be fulfilled without affecting a long-term business relationship or contract.
How can I vary a contract?
These are some of the main ways (although there are others):
This involves drafting a variation and confirming it in writing, but it must satisfy the usual requirements for the creation of a binding agreement, namely:
contractual intention of the parties.
This involves the same process but via email. However, it does still need to be signed. In some cases, the email signatures at the bottom of the parties’ emails can count as the signatures, but electronic signatures are only acceptable if the agreement does not specifically require the document to be physically signed, and if it is appropriate in the circumstances, such as where the document does not have to be physically signed by law.
For an oral variation to be valid, it must have the same requirements as a written variation, but there are two instances where an oral variation cannot apply. Firstly, when it is a contract that is required by law to be evidenced in writing, and secondly where the contract stipulated ‘no oral modification’.
Looking for more advice or guidance on this matter, or any other business-related issue?
rradarstation gives you 24/7 access to guidance, videos and on demand webinars answering frequent questions and downloadable templates to use in the day-to-day running of your business, each written and verified by our legal professionals. You will find the answers you are looking for at rradarstation.