What Does COVID-19 Mean for Commercial Contracts?

The unprecedented impact of the COVID-19 pandemic is causing businesses to review their commercial contracts given the scale of the economic disturbance and commercial uncertainty.

Where commercial contracts are now too difficult or uneconomical for one of the parties to perform, we recommend re-examining them to understand whether or not relief may be available. Alternatively, you may have received requests from the other party in your contracts to terminate or vary the agreement, perhaps on terms that the contract does not provide for. We hope that this article will help you understand some of the options that might be available to you.

As strange as the situation we currently find ourselves in is, there are a number of possible clauses, options and legal precedents that may be relevant to the discussions that you are forced to have at this time. Expert commercial litigation solicitors Louise Johal and Gary Roy discuss each one in more detail below.

Exit clauses

Most contracts will incorporate a number of boilerplate clauses dealing with termination. The termination clauses should be checked as a starting point to see what exit provisions already apply and the consequences of invoking them.

Temporary impossibility

The concept of temporary, or partial, impossibility is relevant to both force majeure clauses and frustration, which we discuss below. Temporary impossibility arises where the thing or person essential for the performance of a contract becomes temporarily unavailable, or when a state of things essential for such performance temporarily ceases to exist. The partial lockdown initiated by the Government due to COVID-19 may make the performance of some contracts temporarily impossible.

There is precedent for temporary impossibility having the effect of discharging a contract. In Taylor v Caldwell [1863] EWHC QB J1, the contract related to “the Surrey Gardens and Music Hall” and was discharged by the destruction of the Hall even though the Gardens (with their many attractions) survived and remained in operation and despite the fact that reduced facilities for theatrical and musical performances in an adjoining building remained available. The contract was discharged because its main purpose (the giving of four grand concerts) was defeated (i.e. it was not necessary for the claim to succeed for the Claimant to have to show that performance of any kind was impossible).

In addition, a contract will be discharged by temporary impossibility where it is one that can be performed only on the day or days over which the temporary impossibility extends. In Robinson v Davison (1871) L.R. 6 Ex. 269, a pianist who was to give a concert on a specified day was held to have been discharged from the contract by his illness on that day. However, whilst a claim for loss of profits was dismissed, a small additional claim for expenses arising as a result of the pianist’s failure to notify the Claimant promptly survived due to the pianist notifying the Claimant via letter rather than the faster telegram.

Therefore, if, due to a state-imposed lockdown or because of illness and the need to self-isolate, someone cannot perform their duties under the contract, it is vital to communicate the situation effectively and in a timely manner.

Force Majeure clauses

If performing contractual obligations becomes temporarily impossible, some contract terms may already include a relevant ‘force majeure’ clause. This can provide for the suspension or abrogation of contractual rights and obligations in extreme or unforeseen circumstances. It is worthwhile considering this term on contracts where either you or the other party are seeking a departure from what was originally intended.

It will often be a matter of contractual construction and interpretation of the relevant force majeure clause to see whether it would cover the current pandemic. Points to consider are whether it includes, for example; acts of government, travel restrictions and epidemics. In addition, you should assess whether the clause requires that performance is actually prevented or hindered.

When looking into a force majeure clause, bear in mind the following questions and considerations:

• Can causation be established in relation to the force majeure clause?
• Is the COVID-19 crisis causing the impossibility?
• Force majeure clauses usually include a duty of mitigation when invoked.

Frustration of contract

Even where a force majeure clause would not appear to cover the coronavirus pandemic, there is the possibility of relying on the doctrine of frustration. The ‘frustration of contract’ refers to the doctrine of discharge by supervening events. A contract is said to be “frustrated” whether discharge occurs by supervening destruction of the subject-matter, or by its temporary unavailability, or by frustration of purpose or supervening illegality.

Frustration operates, not only automatically (i.e. without the choice or election of either party) but also totally. Where frustration can be successfully invoked, all future rights and obligations under the contract fall away. Although the circumstances in which frustration can be invoked are narrow, such are the unprecedented times, where the contract requires performance when there is a state-imposed lockdown, frustration might well be said to have occurred.

In cases where money has been paid before the discharge of obligations occurs, s.1(2) of The Law Reform (Frustrated Contracts) Act 1943 (the ‘Act’) provides that sums paid in pursuance of the contract before the time of discharge shall be recoverable from the payee. S.1(2) also provides that sums payable in pursuance of the contract before the time of discharge shall cease to be payable. The Act goes on to deal with any valuable benefit that is obtained under a frustrated contract and could be interpreted as sums paid can be partially or fully recoverable if the contract is frustrated.

Additionally, there may be an option to claim illegality in connection with contracts where restrictions have been imposed by regulations passed for the Coronavirus.

Every situation is different

As can be expected, this area of law is more complex than can be easily summarised – especially in a time as changeable and unpredictable as this. There may well be a number of avenues available to you to assess the review of contracts or to assist with requests for flexibility from either contracting party. Negotiating the latter will often involve an assessment of how keen you are on maintaining a future commercial relationship with the other party.

Each case will turn on its own circumstances and merits and if you, or your business, becomes affected by the COVID-19 crisis in respect of contractual agreements we would be happy to consider your case and provide you with more detailed advice.

For more information, please visit our commercial litigation service page, send an email to Gary Roy (garyroy@richardnelsonllp.co.uk) or Louise Johal (louisejohal@richardnelsonllp.co.uk), or get in touch with Richard Nelson LLP via our contact page.