The “lockdown” imposed by the government in response to the coronavirus pandemic has caused significant disruption to businesses. Many contracts for the supply of goods or services simply cannot be performed. Anecdotally, at the moment it appears that businesses are trying to work together in a spirit of cooperation. However, as the lockdown persists and financial losses mount, it’s inevitable that businesses will want to know their contractual rights and obligations, and ask whether it’s possible to claim any losses from the counterparty to the contract.
Force Majeure and Frustration are the doctrines most likely to be relevant.
Force Majeure
A Force Majeure clause in a contract specifically deals with events or circumstances outside the parties’ control that prevent one or both parties from fulfilling the terms of the contract. Unless there’s an express Force Majeure clause in a contract, the parties cannot rely on this doctrine.
The first step will be to check whether a pandemic is included in the particular Force Majeure clause. Whilst, some clauses include specific reference to pandemics, epidemics or diseases, many don’t. Even if a clause doesn’t mention pandemics directly, it might still be effective in the current circumstances. Some clauses refer to “Acts of God”, generally defined as natural disasters such as earthquakes or floods, but which could arguably include natural diseases. Some clauses contain a general catch-all provision, for example “any other cause beyond the parties’ reasonable control”. Whether that may be effective is a complex question and often depends upon looking at the clause as a whole.
The second step is to check what the effect of the Force Majeure clause will be to the parties. Again, this will depend on the drafting of the clause. Often, a Force Majeure clause suspends the parties’ obligations under the contract while the event continues, with those obligations to resume once they are able to do so. Other clauses allow one or both parties to terminate the contract.
Frustration
If there’s no Force Majeure clause, then the parties may still be able to rely on the common law doctrine of frustration. Frustration occurs where something happens that makes it impossible to fulfil the contract or radically transforms the obligation to perform from that envisaged when the contract was formed.
The doctrine of frustration is quite limited and, historically, courts have shown reluctance to conclude that contracts have been frustrated.
For frustration to occur, the performance of the contract must have been rendered impossible or fundamentally changed. It won’t simply be enough for the performance to have been made more difficult or expensive. Some circumstances arising from the current coronavirus pandemic may well lead to a contract being frustrated; for example, a contract to provide services for an event may be frustrated if that event was cancelled due to the pandemic.
If a contract is frustrated, rather than it being suspended, it’s discharged. This means that the parties’ rights and obligations under the contract are cancelled. If a party has already incurred an expense under the contract (for example buying stock), then normally it must absorb that as a loss.
A contract can also be frustrated if its performance is now prohibited because it would be illegal. Again, it’s not sufficient for the performance of the contract to be made more difficult, but rather it must be impossible to perform because it would be illegal to do so. On Friday 20 March, the government ordered all pubs, restaurants and gyms to close. Some businesses had already taken the decision to close. Although undoubtedly the socially responsible thing to do, any closure before the official date would not be able to rely on the argument that it was illegal to stay open.
Conclusions
The impact of the coronavirus pandemic is challenging. Many contracts (and indeed businesses) will have simply been stopped in their tracks and overtaken by events. The best course of action is always for businesses affected by these issues to cooperate with each other to find a commercial solution. Where this is not possible, the law provides some mechanisms for establishing the parties’ rights and obligations in these difficult times. Undoubtedly, once the dust has settled, everyone should expect to see amended contracts with new, more detailed force majeure clauses dealing with global pandemics and other unforeseen events.
