Coronavirus: contracts, force majeure and frustration (quick read)
Short version - as the coronavirus situation and potential impact on commercial and business interests unfolds, businesses are looking to their contracts to ascertain what will happen if contracted goods and services cannot be provided due to the impact of the virus.
Please note: the information contained in this legal update is correct as of the original date of publication
As the coronavirus situation and potential impact on commercial and business interests unfolds, businesses are looking to their contracts to ascertain what will happen if contracted goods and services cannot be provided due to the impact of the virus.
In ordinary circumstances, a failure to meet the obligations in an agreement will mean that party is in breach of contract. Depending on the nature of the contract, such failure could have disastrous consequences for both parties. The party in breach may be liable for damages, not to mention legal fees, whilst the party on the receiving end of the breach may find itself without the goods or services it has procured, having to find additional time and cost to bring a damages claim and then having to re-procure the goods or services. It is therefore not surprising that businesses are asking whether the contractual and commercial effects of coronavirus, where this has a significant impact on a particular contract, can be dealt with through the doctrine of frustration or force majeure.
The legal doctrine of frustration enables a contract to be discharged if an event occurs which the parties could not have foreseen and which either makes the contract physically or commercially impossible to fulfil (for example, in a venue hire contract where the venue is destroyed by fire) or changes the parties’ obligations under the contract so drastically that it would be unjust to compel them to continue (for example, performing the contract becomes illegal due to a change in law). The event must be fundamental to the contract and the impact must be more than making performance more expensive or difficult. If a contract is deemed frustrated, it terminates immediately.
An express force majeure clause in a contract allows obligations under the contract to be suspended if specified events or disruptions occur which are outside the control of the parties. This means the non-performing party is not liable for its failure to comply with the contract for as long as the force majeure event continues. Depending on how the clause is drafted, it can also set out a procedure for one or both parties to decide whether to continue with the contract after the period of disruption or terminate in a managed fashion by serving notice.
Courts will not imply force majeure provisions into a contract: if there is no force majeure clause, the parties’ only alternative to deal with unexpected events is under the doctrine of frustration.
Often (but not always) there is a requirement for a force majeure event to be unforeseeable or outside of the control of the parties. It is arguable whether a reasonable supplier should have made contingency plans for illness and shortage of resources, in which case it may not satisfy this requirement. Events or situations that make a contract more expensive or more difficult to perform are generally not regarded as force majeure events.
To establish whether a force majeure clause in a contract is relevant to the coronavirus situation, it is important to carefully review the drafting to identify the acts, events or circumstances that can trigger the clause. Some clauses provide an exhaustive list of trigger events that may be applicable, such as pandemic (very recently declared by the WHO making it more likely that force majeure clauses specifying pandemics are engaged) or perhaps government interventions or changes of law in respect of, for example, new powers of compulsory detention and isolation. However, force majeure clauses are often drafted more widely to refer to events beyond a party’s control. The party wishing to rely on the force majeure clause would need to prove that the coronavirus has prevented it from fulfilling its contractual obligations.
In determining whether a force majeure event has arisen, we need to consider:
- whether the specific contract requirements for an event to be declared as a force majeure event have been met;
- the extent to which the outbreak has prevented, hindered or delayed the performance of the contract;
- whether the circumstances were unforeseeable or out of the parties' control (if lack of foreseeability is included in the drafting); and
- whether there are any alternative means available for performing obligations and steps which could be taken to avoid or mitigate the coronavirus outbreak and its consequences.
Where the clause is triggered by an event which prevents performance, the effects of coronavirus on a particular contract must make it legally or physically impossible for a party to perform its obligation. Alternatively if the clause is triggered by delays in performance, this may be easier to satisfy, depending on the nature of the contract. For example, a provider of critical emergency support services ought to have contemplated how services could be provided in the event of large scale disruption, illness or other nationwide emergency and may not be able to rely on force majeure in these circumstances. Where the only impact is additional cost to perform the contract, force majeure is also unlikely to help.
If the coronavirus situation does not constitute a force majeure event based on interpretation of the clauses (if included in the contract at all), it is unlikely that the doctrine of frustration would, in the current circumstances, provide an alternative defence. Frustration is very rarely used successfully and the courts are reluctant to apply it, even though they may have sympathy for the particular circumstances (although this may change should there be a government imposed lock-down). This is likely to lead to a large number of frustrated (but not in the legal sense) customers and businesses.
You may be interested in...
Browne Jacobson advises Blazehill Capital on senior credit facility
Veganism and manufacturing: Supply chain issues
BBC personality wins appeal on IR35 status
Browne Jacobson advises Care Fertility Group on acquisition of CRGW
Browne Jacobson partner Jeanne Kelly elected President of the British Irish Chamber of Commerce
Browne Jacobson advise on Rcapital’s strategic exit from facilities and property services specialist Triosgroup
'Autonomous vehicles: what the future holds' on-demand
Mediation – remote or in person?
The UK market offers the best value for commercial real estate
Product distribution – how to protect yourself from an early exit
Automotive webinar - EV charging points: contractual and liability issues to be aware of
Automotive webinar - Grant Funding and Collaboration Agreements
In this session, we examined the legal framework around grant funded collaborations and discussed the key risks to be aware of, including IP ownership and compliance with grant terms.
Automotive webinar - Commercial Contracts
Browne Jacobson advises sustainable waste solution provider Covanta Europe on its new Wellingborough based aggregate processing plant
Press Release - #BeingBrowneJacobson
From associate to partner in an investment lifecycle - Ryan's story
Press Release - #BeingBrowneJacobson
Browne Jacobson helps the Civil Aviation Authority take off with its modernisation masterplan
Fashion retailers: Is this the end for free returns?
Luxury brands and sustainability: The challenges and solutions
Trigger happy when directors’ duties are the target?
In a judgment handed down yesterday the Supreme Court has affirmed that a so called “creditor duty” exists for directors such that in some circumstances company directors are required to act in accordance with, or to consider the interests of creditors. Those circumstances potentially arise when a company is insolvent or where there is a “probability” of an insolvency. We explore below the “trigger” for such a test to apply and its implications.
The Retained EU Law
Created at the end of the Brexit transition period, Retained EU Law is a category of domestic law that consists of EU-derived legislation retained in our domestic legal framework by the European Union (Withdrawal) Act 2018. This was never intended to be a permanent arrangement as parliament promised to deal with retained EU law through the Retained EU Law (Revocation and Reform) Bill (the “Bill”).
Sequana: Supreme clarification on the duty owed to creditors
The Supreme Court has unanimously dismissed the BTI v Sequana appeal and reviewed the existence, content and engagement of the so-called ‘creditor duty’; being the point at which the interest of creditors is said to intrude upon the decision-making of directors of companies in financial distress.
IR35 rules to be scrapped from April 2023
The problematic transition to electric vehicles - what is the impact on manufacturing
It was reported in May 2022 that the BMW-owned manufacturer had been forced to put a temporary stop on the production of all manual transmission vehicles due to the global semi-conductor shortage and the war in Ukraine. Mini stated that the move was made in order to "ensure production stability".
Press Release - Firm news
Browne Jacobson strengthens its UK&I commercial practice with hire of new retail & consumer specialist partner
Browne Jacobson has bolstered its commercial practice in the UK with the appointment of commercial contracts and international trade specialist, Emma Roake, into its City-based London team.
Browne Jacobson’s Private Equity specialists advise Palatine on key CTS exit
Browne Jacobson’s national private equity (PE) lawyers have advised leading mid-market PE investment firm, Palatine Private Equity (Palatine) on its exit from CTS Group, the fast-growing specialist in testing, inspection and geoengineering consulting services to the construction and infrastructure sectors.
Browne Jacobson’s specialist corporate finance lawyers advise LDC on sale of global IT services provider
Browne Jacobson’s corporate finance lawyers have advised leading mid-market private equity firm, LDC and management on the sale of specialist managed IT services provider, Littlefish to Bowmark Capital.
Digital Markets Act and Data Platforms - FRANDs for life?
The Digital Markets Act (the “DMA”) joins the dots between competition law and data protection law and actively targets data-driven platforms. It is also a comprehensive regulation to take note of, with familiar GDPR-style fines tied to turnover.
Cameras in convenience stores: a potential hornet’s nest..?
Merger and Acquisition trends in the specialist lending market
Rolls Royce SMR ambitions will bring Hinkley like benefits to regions
Rolls-Royce has shortlisted six locations for its first factory for small nuclear power stations. We look at the impact on regions & local businesses
Banking Transaction Update July 2022 - North West transactions
There are clearly challenging macro-economic factors at play but at Browne Jacobson we continue to see good levels of transactional activity with certain sectors being particularly buoyant: healthcare, financial services, energy & infrastructure and tech.
Covid Rent Arrears: Cinema operators’ appeals dismissed
The Court of Appeal has dismissed two cases regarding rent arrears accrued during the Covid lockdowns. The cases are London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd.
Browne Jacobson advise on the disposal of international chemical manufacturer
Browne Jacobson’s corporate lawyers have successfully advised the shareholders of specialist chemical manufacturer, Amity International on its acquisition by Belimed AG, a subsidiary of Metall Zug AG.
Proceed with caution – covenants in franchise agreements
In the recent case of Dwyer (UK Franchising) Limited v Fredbar Limited and ano’r  EWCA Civ 889, the Court of Appeal considered the reasonableness of restrictive covenants in a franchise agreement.
Browne Jacobson’s North West dealmakers advise on shipping and logistics business acquisition of Lancashire based World Options
Browne Jacobson’s Manchester based corporate lawyers have advised tech enabled shipping and logistics service provider, World Options on its majority buyout by Italian headquartered MBE Worldwide (“MBE”) for an undisclosed sum.
Browne Jacobson advises AIM listed green hydrogen tech business on global electrolyser licence deal
Browne Jacobson’s specialist cleantech lawyers have advised AIM market listed Clean Power Hydrogen Group Limited (CPH2) on its global licence agreement with GHFG Ltd.
Court of Appeal overturns “fire and re-hire” injunction
The Court of Appeal overturned the “fire and re-hire” injunction, finding that there was nothing in the express contractual provisions preventing Tesco from giving the notice to terminate employment in the usual way.
Browne Jacobson advises BGF on its exit from business communications specialist Jola Cloud Solutions
We advised equity investor, Business Growth Fund on its exit from mobile data SIMs & business communications specialist Jola Cloud Solutions.
Browne Jacobson dealmakers advise on Dutch PE firm’s investment into Cooper Parry
Browne Jacobson have successfully advised the partners of leading accountancy firm Cooper Parry on the agreement for Dutch based firm, Waterland Private Equity to invest in the business.
Compliance - small businesses and new regulation
The Federation of Small Businesses (FSB) has released a report setting out the impact of new and changing regulations arising from the pandemic on small businesses across the UK.