Cancellation of contracts due to coronavirus
Due to the outbreak of coronavirus and the recent Government restrictions on our daily life, more and more individuals and businesses are looking at contractual arrangements that they entered into and are considering their options where it may not be possible for the contract to be performed, i.e. wedding receptions or where the contracted services are no longer required.
Force Majeure clauses
The starting point is to see what your contract actually says. It is possible that the contract will include a force majeure clause (although it may not actually be referred to as one). Force majeure is a term used to describe an event that is beyond the control of the parties, and which prevents them from fulfilling their contractual obligations.
Even if your contract contains force majeure provision, whether this is triggered by coronavirus will depend on the wording of the relevant provision and the impact of the coronavirus on the parties’ ability to perform the contract. The force majeure event, i.e. coronavirus, itself must be shown to be the cause of the failure of performance of the contract.
It is usual for such clauses to excuse a party’s non-performance and then to allow the parties to terminate the contract if the force majeure event continues for a defined period of time. However, the provision may provide for an extension or suspension of time to comply with the contractual obligations, compensation or renegotiation of the contract or termination. Again, the parties need to consider the terms of the clause.
Steps that can be taken to reduce the impact on the contract should be considered and a party seeking to rely on a force majeure clause will have to follow the relevant notice provisions in the contract and note any time limits. Records and other evidence should be kept to be able to establish the impact of force majeure events.
The contract may establish what will happen to any money paid prior to the force majeure event. The fairness of any ‘non-refundable’ payments clauses in the event of a force majeure can be considered. If a party to the contract is a ‘consumer’ and they are adversely affected by the force majeure clause, they may be able to set aside the clause pursuant to the Consumer Rights Act 2015, on the basis that it was not written in plain and intelligible English.
If the contract does not contain a force majeure clause, and coronavirus has made it impossible for the parties to fulfil the contract for a reason not anticipated in the contract, i.e. a pandemic, the parties may be able to rely on the doctrine of frustration under which the contract is brought to an immediate end and the parties are automatically released from their obligations.
A contract will be discharged by frustration if, after it has been entered in to, an event occurs (beyond the control of the parties and without fault) which makes further performance of the contract impossible, illegal or something different from what was contemplated by the parties when entering into the contract.
If there is a radical difference between the original contractual obligation and the performance that is possible due to the change in circumstances, the doctrine of frustration may apply. However, this is a high threshold and performance must be rendered impossible, not just more difficult or expensive.
Sums due and payable prior to the frustration will need to be paid, but there could be a reallocation of pre-paid sums and an account for any valuable benefit gained prior to the frustration, to prevent unjust enrichment.
Consideration should be given as to any insurance provisions and whether any losses are covered. The parties should make sure that any claims are made in accordance with the requirements of the policy
Communication is key
If none of the above options apply, the parties should look to discuss matters to see if it is possible to resolve any contractual issues. Both parties may be open to agreeing a variation to the terms of the original contract to the satisfaction of both.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.