Can you really suspend or terminate a contract because of COVID-19?

26th March 2020

Can you really suspend or terminate a contract because of COVID-19?

COVID-19 has got everyone talking, especially businesses, who are finding themselves unsure on the impact this may have on their commercial contracts.

The reality is that many businesses are left pondering how they may fulfil their contractual obligations in these unprecedented times. This is where Force Majeure clauses may assist. These clauses are typically found in most commercial contracts and attempt to alleviate a party from its obligations under the contract without incurring liability for the non-performance of those obligations.

What is Force Majeure? 

In short, a Force Majeure clause allows a party to suspend or terminate performance of their obligations under a contract where there has been an “act of God”, ie. an event outside of a party’s control. The law recognises that where an event arises outside of a party’s control, the party seeking to rely on the Force Majeure clause, who cannot now fulfil their contractual obligations, will not be liable for failure to perform.

Does COVID-19 constitute Force Majeure?

Whether or not a non-performing party can rely on a Force Majeure clause, if indeed there is one, will depend on the precise wording of that clause. Typically, you will find the following terms (or similar wording) in a Force Majeure clause:

  • “compliance with any law or governmental order, rule, regulation or direction”
  •  “pandemic”
  •  “epidemic”
  •  “disease”

If the contract doesn’t use specific terms, but does in fact refer to an event beyond a party’s reasonable control, this may be enough for a non-performing party to rely on. However, Force Majeure events should, as a matter of practice, always be expressly stated to avoid legal contention. It should be borne in mind that there is no accepted definition of what constitutes a Force Majeure event, and the courts will always look to take into account the circumstances of the matter at hand, the intentions of each party and what evidence is put before them.

What happens after identifying that there may be an event that constitutes Force Majeure?

Again, consideration must be given to the precise wording of the clause. Key words to look out for are:

  •  “prevent”
  •  “hinder”
  • “delay”

If there are additional qualifications similar to the above, the onus will be on the party seeking to rely on the clause to evidence that the event did in fact “prevent”, “hinder” or “delay” their performance. These are difficult hurdles to overcome as a non-performing party looking to rely on the fact they were “prevented” from performing their obligations must show that the performance of those obligations under the contract has been frustrated.

It is also worth bearing in mind that mitigation will be key in establishing a solid case. A non-performing party ought to take all reasonable steps they can in attempting to perform their obligations under the contract. Until those steps have been exhausted it may be difficult for a party to rely on being “prevented” from performing the contract.

What happens to the contract after a party relies upon a Force Majeure clause?

This will depend on what the clause states. Usually, there will be a right to terminate after a certain period of time lapses. However, you may also find that the contract comes back into effect once the event ceases.

What is certain and common in these Force Majeure clauses is that the non-performing party, on being able to evidence or otherwise establish at law the impossibility to perform, will be released from their obligations under the contract and any liability that arises as a result.

Other considerations to look out for

In the absence of a Force Majeure clause in a contract the courts may decide to terminate the contract immediately where it has been established that the contract is frustrated at law. However, this only applies where there is a significant change of circumstances that materially affects the original obligations of the non-performing party under the contract as a result of “an act of God”.

If you need any help with understanding your obligations and position under a commercial contract as a result of COVID-19 please do get in touch with Elizabeth Clazie at Gotelee, email [email protected], telephone  01473 298187.

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