Contracts and Coronavirus – force majeure and frustration

As the impact of Covid-19 continues to spread, we are seeing some clients express concern that they may not be able to perform their obligations under contracts with customers.

Here, we look at how businesses' contractual responsibilities may be affected by the coronavirus.

First, do I have a contract?

A contract is a legal agreement that gives new rights and responsibilities to those who agree the terms of the contract. Contracts can be formed verbally or in writing. For example, a contract can be created by email, letters or during a verbal communication.

A valid contract consists of:

• offer;
• acceptance;
• consideration;
• intention to create legal relations; and
• certainty of terms.

What about breach of contract?

Due to the current pandemic, your business might be unable to fulfil its contractual obligations or suffer loss because the other party has failed to comply with their duties. Generally, a claim for damages for breach of contract would be available.

How does a pandemic or crisis situation affect breach of contract?

However, if the contractual failure was caused by Covid-19, more commonly known as coronavirus, then the claim for breach of contract might fail for one of the following reasons:

• There was a force majeure clause in the relevant contract; or
• The doctrine of frustration applies.

Force majeure

A force majeure clause suspends one or both parties from their obligations to perform a contract due to the occurrence of certain events which are beyond the parties' control.

Before claiming for breach of contract it is sensible to check the terms of the contract to determine whether a pandemic or crisis is covered by the definition of force majeure.

Frustration

A contract can be discharged on the ground of frustration when something unpredictable occurs after the formation of the contract rendering its performance impossible.

To successfully claim frustration of a contract the following criteria should be satisfied:

• a frustrating event takes place after the contract has been formed;
• the frustrating event is unpredictable and was not contemplated by the parties when they formed the contract;
• the frustration was not due to the fault of either party; and
• the frustration renders further performance impossible.

If you would like initial advice on these areas, our Commercial Contract Disputes solicitor Richard Darbinian provides a free half hour consultation.

Please contact Richard at Richard.Darbinian@wards.uk.com