Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
The protective measures and staff absences resulting from COVID-19 are causing many businesses concern regarding their contractual rights and obligations. Some are unable to meet deadlines to provide goods or services to their customers; others are being let down by their supply chain. Many face both worries.
The general rule under English law is that contractual obligations are binding and absolute, so that a party is not absolved from performance merely because this has become more expensive, more difficult, or even proves to be impossible. In contrast with many civil law systems which adopt the principle that impossibilium nulla obligatio est (the impossible is no legal obligation), English law has no difficulty in holding contracting parties liable for failing to do the impossible.
The starting point is, therefore, that COVID-19 is no excuse for failure to meet existing contractual obligations. However, there are some options that may give relief to parties from obligations which they are unable to perform. Here is our list of the six key issues to consider when looking at your contracts in the current crisis:
Does the Contract Contain Express Terms which Excuse Performance?
Some contracts include express provisions which may excuse performance in particular circumstances, sometimes described as ‘force majeure.’ Such clauses may be short and simple, such as “Neither party shall be liable for failure to perform its obligations if such failure result from events, circumstances, or causes beyond its reasonable control.” Or they may be much longer, defining precisely which circumstances give relief and setting out the procedure for claiming and the consequence of doing so. Some clauses expressly refer to the occurrence of an epidemic or pandemic.
Whether or not a force majeure clause is triggered will be heavily dependent on the wording of the particular clause and the relevant surrounding circumstances. Where a force majeure clause potentially applies, thought must also be given to any steps which must be taken to avail of it (such as giving notice) and also to whether the outcome of triggering force majeure (for example a right to terminate the contract) is desirable.
Does the Contract Contain Express Terms which Limit Redress?
Many contracts limit the consequences of breach, perhaps by placing an overall financial cap on liability, fixing the damages at an agreed or liquidated rate (typically for delay in delivery), or excluding liability for economic or consequential losses. If you are let down by your suppliers, you may therefore find that while you have a claim for damages for breach of contract, you are unable to recover some or perhaps all of your actual loss.
In a business to business context, there is sometimes scope to challenge unreasonable provisions limiting liability if they fall foul of the Unfair Contract Terms Act 1977. In a consumer context, such provisions are more vulnerable, and may be negated by the Unfair Terms in Consumer Contracts Regulations 1999 or the Consumer Rights Act 2015. Conversely, such clauses may offer you valuable defences if you find yourself unable to meet your obligations.
Contractual Rights of Termination
Your contracts are likely to make express provision for termination for breach, and may include a right to terminate at will. If you are let down by supplier you may be able to terminate its contract (whether for breach or at will) under a contractual power, but should carefully consider the consequences. In many situations it may be better not to terminate, but instead to hold suppliers to their obligations and claim damages; or else to terminate under the common law rather than under a contractual mechanism, so as to recover greater damages. Conversely, if you are unable to perform but have a right of ‘termination at will’ you may look to bring your further obligations to an end by terminating.
You may also have a continuing contract with no obvious end date or power of termination. Rolling contracts which do not provide expressly for any right to terminate are often interpreted or found to contain an implied term permitting termination by either party on reasonable notice, as the common intention of the parties when they entered into the contract. Whether such a right arises, how such notice must be given, how long the reasonable period of notice may be, and whether it must be given to expire on a particular day all need careful analysis if the termination is to be effective.
The Option of Terminating under the Common Law
Any breach of contract gives rise to a claim for damages, but not every breach gives a discharge from liability. However, some do, as a matter of law – for example, in circumstances where one party shows an intention not to perform or expressly declares that it will be unable to perform its contractual obligations in some essential respect, or by its own actions or default makes it impossible for it to do so. A supplier with deadlines to meet but who closes its factory and lays off its staff due to COVID-19 may well fall into this category.
If you are the innocent party faced with such a breach, you have the option to ‘affirm’ the contract and continue to call for performance, or to accept that the contract is at an end. Critically, unlike the situation where a contract is terminated under a contractual right, termination by this route usually allows you, as the innocent party, to recover damages for loss of the contract itself, including the costs of purchasing at a higher price from elsewhere. However, it is a potentially risky approach – if you wrongly terminate for renunciation when doing so is not justified, you are likely to have renounced the contract yourself, and so be liable to the originally guilty party.
The Potential for Frustration
Much thought has turned of late to the legal doctrine of frustration and its applicability to COVID-19, as frustration has the potential to relieve contracting parties of any further obligations. A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which either makes it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken when the contract was made.
In principle, the measures taken in response to COVID-19 could fall within that category. However, the English courts are reluctant to let frustration allow contracting parties to get out of a bad deal, and limit applicability to genuinely unanticipated circumstances for which the parties did not and could not be expected to provide. The more a contract provides for unforeseen events, for example by a force majeure clause, the less the scope to argue frustration. The consequences of frustration are largely governed by statute. In essence, no further performance is required, and money paid must be refunded, but a supplier may retain or recover earlier payments to cover its expenditure.
Perhaps the nearest example to the current situation lies in the leading 1918 case of Metropolitan Water Board v. Dick, Kerr & Co. A contract made in July 1914 to build a reservoir by 1920 was subject to a typical building contract proviso – if the contractors should be impeded by any external cause, then the engineer had power to grant an extension of time. After war broke out, the contractors were legally obliged by wartime regulations to stop work on the reservoir. Although delay events had been anticipated when the contract was made and there was a power to extend time for external causes of delay, the contractors argued that the interruption was of such a character, and likely to last so long, that recommencing work after the war would be a different undertaking altogether. The House of Lords agreed, holding that the contract was frustrated, and thus was no longer binding.
On the other hand, in The Eugenia, the Court of Appeal held in 1964 that a contract chartering a ship to sail from Italy to India, a journey which all assumed would be made via the Suez Canal, was not frustrated when the canal was blocked by the crisis in 1956 forcing the ship to sail round South Africa’s Cape of Good Hope. The court found that while undoubtedly very much longer and costlier, the journey was not a fundamentally different undertaking. The contract therefore remained binding.
It remains to be seen to what extent COVID-19 will be found to have made contractual obligations sufficiently different in kind as to bring contracts to an end, and each contract will need to be considered separately. It is clear, however, that it is not enough for an unexpected turn of events to make an obligation significantly more onerous than originally contemplated. It must be a fundamentally different obligation altogether.
The Scope for – and Dangers of – Renegotiation
Most businesses have (or at least would like to have) long term, mutually beneficial relationships with their customers and suppliers. In exceptional circumstances such as these, you may want, or be asked, to renegotiate agreed payment terms, delivery dates, prices and so on. Typically, parties are bound by the terms which have been agreed, and there is no right to vary the terms (and in some instances, such as retail financial services, even if there is a contractual right to vary contract terms it may be a breach of regulation to do so). A renegotiated contract is often preferable to tarnished relationships when the world gets back to normal, the uncertainty of a legal battle, or even insolvency.
However, no negotiation can sensibly take place without a grasp of the alternatives. You should also guard against allowing such negotiations to give rise to the unintentional waiver of contractual rights, or the loss of a right to terminate. We would also suggest exercising caution before asserting that a contract has been frustrated or that you will not be able to perform in any negotiations – those very assertions may themselves amount to renunciation and so expose you to the risk of liability.
