In the current climate, it is to be expected that parties to commercial contracts may find it difficult to fulfil their contractual obligations due to disruptions caused by staff shortages, disruptions in supply chains or a party’s inability to pay the monies it owes due to financial difficulties. In these circumstances, there are a number of contractual and common law principles which may apply to allow a party to delay or be excused from its performance obligations, or bring the contract to an end.
Some contracts will contain clauses known as ‘force majeure’ clauses which allow the parties to be excused from performing their obligations under the contract if any one of a certain number of events occur. The events specified will include those which are outside of either party’s control and typically will include the outbreak of war; terrorist attacks and acts of God (natural disasters) occurring. Depending on how the force majeure clause is drafted, a party’s obligations may be suspended for so long as the force majeure event continues, the liability of non-performing party may be removed or the parties may be permitted to serve notice of termination after a specified period. Epidemics and pandemics are not always explicitly included in force majeure clauses however we would recommend a review of your contract to consider whether the coronavirus pandemic is likely included within the scope of its drafting.
It’s important to note that the ‘force majeure’ principle will only be relevant to a contract which includes a specific force majeure clause.
Frustration is a common law doctrine which occurs when a contractual obligation becomes incapable of becoming performed because a supervening event renders it:
• physically or commercially impossible to perform the contract; or
• transforms the obligation to perform into a radically different obligation from that undertaken when the contract was entered into.
Covid-19 may be a supervening event: it is outside the parties’ control and depending on when the contract was entered into, the pandemic may not have been within the contemplation of the parties. This said, if a force majeure clause in a contract contemplates a supervening event or type of event it cannot be said that the event renders performance of the contract radically different from that contemplated and therefore if a force majeure clause includes a pandemic, frustration will not be available. Where frustration occurs, the contract is automatically terminated without the parties electing for termination of the contract.
It may be possible for a party to terminate its contract in light of the pandemic in which case, it is important to check the contract for circumstances under which the contract can be terminated and any requirement for the provision of notice of termination. Termination will end the parties’ primary obligations under the contract. In certain types of contracts, a Material Adverse Change clause may exist, allowing for termination of the agreement or, in the case of facility agreements, a material adverse change may constitute an event of default of the borrower. Consideration should be given to the drafting of such clauses as to whether the pandemic could give rise to a material adverse change and the effect of the relevant clause.