Can the Covid-19 (coronavirus) pandemic be used to terminate a contract?

A pandemic isn’t a common occurrence, especially on a global scale like the current Covid-19 (coronavirus) pandemic. Now that we are going through this difficult period, everything from daily life to the commercial world is in upheaval. It’s an understatement to say that we were unprepared for such a large-scale outbreak of a disease. From our perspective, as a law firm, one area we are keen on addressing is the effect of this pandemic on contracts.

Does a pandemic like the Covid-19 (coronavirus) have an effect on contracts in the UK?

We can only address this part generally because all contracts are different and need to be assessed individually. If we spoke generally, all contracts should have clauses that address situations like this. 

The purpose of a contract is to outline what would happen in various situations. Often, the so-called “boilerplate” clauses cover matters like a natural disaster or a pandemic, but there is still a need to customise them for each specific contract, be it an agreement between a buyer and seller or a tenant and landlord.

Which clause should you look for to see if your contract covers a situation like this?

You have probably heard the term ‘force majeure’ a number of times recently. It is a French term defined as “unforeseeable circumstances, normally a superior act, that prevent someone from fulfilling a contract”. It is used in contracts to protect the parties when something happens that is outside of their control.

Force majeure – Unforeseeable circumstances, normally a superior act, that prevent someone from fulfilling a contract.

The problem that arises is that a party i.e. the ‘affected party’ is unable to perform its obligations under the contract. 

Each party in a contract is expected to carry out specific duties and adhere to certain requirements when they enter into a contract. If a situation arises outside of the control of the parties involved, it is known as a ‘force majeure’ event.

Is force majeure normally used in the UK under English Law?

Under English law, contractual performance will be excused due to unexpected circumstances only if they fall within the relatively narrow doctrine of frustration. Force majeure is not a standalone concept of English law, which is why you should not see it as a reason to terminate a contract unless specified in the contract.

What is frustration of contract?

A contract may be frustrated where there is unforeseeable change in circumstances after the contract was made. The change is not the fault of either parties, and creates an environment where it is impossible to perform or deprives the contract of its commercial purpose.

Is the pandemic like the Covid-19 (coronavirus) the reason to invoke force majeure or frustration of contract?

Simply put, no. It’s the implemented consequences of the pandemic, not the pandemic itself which would be the reason for triggering force majeure. 

For example, if Party A had purchased an item and it was to be delivered by Party B based in a foreign country, but the government brought in travel restrictions before this could happen. This would create a situation whereby the contract which outlined this transaction cannot be fulfilled anymore. It’s the consequences of the pandemic, not the pandemic itself which result in a contract being revoked.

Can a party use Covid-19 as an excuse to terminate a contract?

If a party does not abide by a contract and uses the pandemic as an excuse, they need to provide evidence that the consequences of the pandemic created a situation which led to the non-performance of a contract.

How should you go about making sure you can either terminate a contract or if the termination was lawful?

You need to review your contract or get it reviewed by a legal professional in order to verify the following:

  1. The contract has the relevant clauses regarding such situations 
  2. The Law Reform (Frustrated Contracts) Act 1943 (Act) applies to the contract

Currently as it stands, It’s difficult to say what impact the pandemic will have on specific contracts as it depends on individual facts. We recently dealt with a client who entered into a contract with Party B on 28th February 2020. 

Having signed the contract, Party B decided to travel abroad in early March knowing full and well there could be restrictions in place due to the pandemic. As expected, Party B is now unable to travel back, and they wanted to terminate the contract with our client. Party B’s argument was that of frustration. 

Our proposed defence is that the breach of contract cannot be claimed because of frustration as Party B should or ought to have known by late February that going abroad is risky as many nations were already restricting air travel. Thus, this pandemic can not affect their obligation under the contract on the grounds of frustration.

A recap on use of Covid-19 (coronavirus) as a reason to terminate a contract.

  • Every contract needs to be reviewed individually in order to assess if the contract contains clauses that cover such a scenario.
  • The specific clause covering such matters could discuss a ‘force majeure’ event, however this isn’t a standalone concept of English Law.
  • The narrow doctrine of frustration is more applicable and can be applied to contracts, but again, this needs an assessment.
  • It’s the consequences of the pandemic, not the pandemic itself which would lead to non-performance of contract.
  • Any contractual performance not being met would have to be assessed individually.

If you would like to discuss this matter, please email us on contact@freemanharris.co.uk or call 0207 790 7311. We would be happy to help you with your contract and its performance during this pandemic.

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