At this time we understand that many of our clients may have serious concerns regarding contracting parties seeking to avoid contractual obligations in light of the impact of the Covid-19 virus. Alternatively, as an organisation, you may have concerns regarding your ability to perform your obligations under your contracts.
Many of your existing contracts will include force majeure provisions. Force majeure is commonly understood to mean acts, events or circumstances beyond the reasonable control of the relevant party which prevent that party from performing its obligations under the contract and no reasonable steps could have been taken by the party seeking relief to avoid the consequences of such an event.
On the occurrence of a force majeure events, the affected party is not liable for its failure to perform part of all of its contractual obligations. Contracts typically provide for a suspension of contractual obligations e.g. for the duration of the force majeure event and may include the possibility of termination of the entire contact if the event is continuing for a prolonged period of time.
The question then follows – is Covid-19 a force majeure event under your contracts? Analysing this type of situation is very fact specific and will depend on the drafting of your contract. Potentially relevant events which may be set out in your contracts include (i) epidemic or pandemic, (ii) law or action taken by a government or public authority and (iii) non-performance by suppliers or sub-contractors. Again, subject to the drafting, the event itself would need to hinder performance of the contractual obligations or make them impossible.
If Covid-19 is a force majeure event under a contract, the party relying on the provision will need to ensure they comply with any formalities required by the contract such as notice provisions.
Even if your contract does not contain a force majeure clause, the doctrine of frustration might apply. There is a high hurdle for establishing that the requirements of frustration are met. If something occurs which makes the performance of the contract physically or commercially impossible, or where an event makes the obligations under the contract radically different to the obligations at the time the contract was entered into, the principle of frustration could apply to automatically discharge the contract. This means that when an event capable of satisfying the requirements of frustration occurs, the parties are no longer bound to perform their obligations under the contract.
However, as noted above, the hurdle is high for establishing frustration. Examples of circumstances where a contract will not be frustrated include where (i) an alternative method of performing the contract is possible (even where this is more expensive), (ii) there are changes in economic conditions and (iii) where the frustrating event should have been foreseen by the parties.
Before you decide to take any form of action we would advise that you check your contracts and seek legal advice in the first instance.
For related information, please see our article on The Impact of Covid-19 on your Live Construction Projects.
We also have more information on force majeure and insurance claims in this article, Covid-19 and Insurance Issues: An Update