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Coronavirus (Covid - 19) and Breaking Contracts

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Coronavirus (Covid – 19) and Breaking Contracts

The Covid-19 pandemic is not the first time the UK has had an emergency that has put a strain on those with contractual obligations who worry  about how they are to meet those obligations. The law has certain rules that apply (unless Parliament or the Courts make a radical change).

  1. Varying the contracts. There are very few contracts that can not be varied by the agreement of the affected parties. It is best if the variation is confirmed in writing.  There is more scope for argument later (often in Court)  if a contract is varied without professional help.
  2. Check the terms and conditions (the small print”), especially for a “Force Majeure” clause. More on that below.
  3. If the performance of the contract is impossible or transforms the contract into a radically different obligation from that originally agreed, then the concept of “Frustration of Contract” can release both sides from their obligations under that contract. More on that below.
  4. The other party is in breach of a fundamental part of the contract. That often releases the other from performing the contract unless they “affirm” by words or by their actions in the face of the breach to show they regard the contract as continuing.

The Terms and conditions will often be in writing. Quite often both sides know exactly what the terms and conditions they have signed up for are. However in practice we all know that we often tick the box on an internet contract saying we have read the terms and conditions and agree them without ever actually reading them. The law will almost always say we are bound by those terms and conditions even if we prove we have not read them. Anyone who enters into a contract and are referred to written terms and conditions that can be accessed or a copy obtained before the contract was entered into is normally bound by those terms and conditions even if they prove they did not access or obtain those terms and conditions before entering into a contract. The more onerous the obligations on the other party, the more prominent the notice directing  them to the terms and conditions should be. Even commercial organisations sometimes enter into contracts without reading  the terms and conditions and occasionally both send the other their terms and conditions to the other so the law has to  establish whose  terms and conditions apply.

Once you have the terms and conditions, check the terms and conditions to see whether either side can argue they need not continue as planned  in this situation.  If it is there such a provision, it is often in the “Force Majeure” clause. There is no substitute for reading that clause and seeing whether the words apply to this situation and if so what the contract says happens next. Never read a passage of a contract in isolation since the Court will look at the contract as a whole and, if necessary, the surrounding circumstances as well.

Frustration of Contract is explained by the following passage in a House of Lords decision that  confirmed  the current rules.

“ Frustration of Contract takes place when there supervenes an event ( without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature ( not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal  sense of its stipulations in the new circumstances; in such case the Court declare both parties to be discharged from further performance”.

Do not expect any Court to apply a wide interpretation of these words and it will look at the full contract and surrounding circumstances carefully to see what the intention was. The law and the Courts will normally expect everyone to honour contracts even in these extraordinary times unless the performance of the contracts has become illegal.

Examples of situations where the Courts have released parties from contractual obligations because of Frustration are:

  1. Cancellation of an expected event. The classic case is the hiring of a vantage point to view the coronation of Edward V111 in 1902. The coronation was postponed but the hirers could still have used the vantage point had they wanted to but it was clear from the surrounding circumstances that the only reason they hired the vantage point was to view the procession. Contrast that with the hiring of a boat to view the Fleet during  the naval review in 1902. When that was cancelled the hirer of the boat was still obliged to pay because they could still view the navy ships at anchor.
  2. Illegality. No contract can force another to commit an illegal act. Many of the cases here involve contracts made that were subsequently made illegal by the onset of war (contracts with the enemy for instance often became illegal). In the current pandemic situation, advice by the Government for certain events to cancel and premises to close is unlikely to be enough,  but a prohibition making the event illegal or forcing the premises to close  may well frustrate the contract but be careful; the  full contract and surrounding circumstances must be considered. Remember also the words in the House of Lords passage “ for which the contract makes no sufficient provision”? That points us especially to Force Majeure clauses that explains what happens next, though that still can not be used to force another to commit an illegal act.
  3. Delay. This is quite rare but extraordinary delay might be a cause for Frustration of Contract.

There will be a separate blog on how this affects contracts of employment shortly and this blog is not to be regarded as a substitute for specific legal advice on a set of specific facts nor is this blog intended as a comprehensive review of this complex area of law. John Hodge Solicitors can help draft a variation of contract or review contracts to advise on outstanding obligations (if any) under it.