Many businesses are finding that the ability to provide services or goods is affected by the Coronavirus pandemic.  Furthermore, customers are seeking to assert that the pandemic relieves them of their responsibility to comply with contractual payment obligations. 

Whilst, as a general rule, non-performance will result in the defaulting party being in breach of contract there are two key exceptions – (1) an express force majeure provision within a written contract; or, in the absence of this, (2) reliance on the common law doctrine of frustration.

Force Majeure

Unlike in other jurisdictions there is no definition of force majeure under English Law either in statute or case law.  Furthermore, the concept of force majeure will not be implied into a contract so a party can only rely on this concept if it is expressly covered in the contract.  Whether a particular clause is triggered will depend on the wording of the clause and in particular the non-exhaustive list of events that are often included in a force majeure clause. The wording of the force majeure event is key and because of the serious impact on the parties’ rights and obligations, force majeure clauses are interpreted strictly by the English courts so it will be necessary to consider the precise terms of any clause. 

Where reference is made to an “epidemic or pandemic” the WHO’s recent announcement that coronavirus constitutes a Pandemic means that force majeure clauses which specify “pandemic” within their definition now appears likely to be engaged.

Whether or not a pandemic or epidemic is expressly included in the definition of force majeure, Coronavirus may fall within the scope of an act of god or some other catch all provision and may therefore be a contractually legitimate force majeure event excusing the performing party of its obligations.  However, with major events such as exceptional storms and a change in economic markets having not previously been classified as an “act of god” by the courts, it is clear that demonstrating an act of god is a high burden.  To assist in this it is incumbent on the supplier to take all reasonable steps to mitigate the effect of the force majeure event and in order to rely on a force majeure clause, the party looking to be excused must have been ready and willing to perform had it not been for the force majeure event.  In order to comply with these requirements consideration must be given as to whether the inability to perform has been caused by the virus itself or by some third-party intervention, i.e. government action to enforce quarantines etc. 

Given the basis of a contractual force majeure provision is to allocate risk in the event of circumstances which hinder or prevent contract performance, it’s not unusual to see a force majeure clause drafted to specifically deal with payments by the customer where the supplier suffers a force majeure event.  Wording along the lines of “The corresponding obligations of the other party will be suspended, and its time for performance of such obligations extended, to the same extent as those of the affected party” would permit the customer to suspend payments for the affected obligations. 

However, if the force majeure clause doesn’t allow the customer relief from its payment obligations, can the customer itself rely on strained economic circumstances as a force majeure event enabling it to suspend or withhold payment?   It is well established that economic or market circumstances cannot be a relevant event for the purpose of a force majeure event.  In the case of Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm) the court said, “…a change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not to be regarded as a force majeure event”.  Further, the court concluded that the words “any other cause beyond the Seller’s reasonable control” in a force majeure clause should be construed narrowly and did not include the purchaser’s inability to pay due to credit market conditions.  A failure of performance due to insufficient financial resources has been held not to amount to force majeure.  The same applies to a rise in cost or expense.  Therefore, the global economic downturn caused by Coronavirus is not relevant for the purpose of a force majeure clause.

In the event that obligations under a contract are suspended or the contract is terminated, unless specified otherwise, each party will typically bear their own costs.  If one party has paid for a service that has now been rendered impossible, hindered or delayed, what happens next will depend on the circumstances.  If the force majeure clause provides for termination of the contract an express clause may also provide for what happens to any money already paid.  Where the force majeure event is considered temporary, it is likely that no money will be returned as the obligations of both parties will resume once the force majeure event has ceased.  However, in circumstances where the force majeure event will continue indefinitely the paying party may well be entitled to restitution (although case law is unclear on this point) or the contract may be considered “frustrated” in which case monies will be returned via restitution under the Law Reform (Frustrated Contracts) Act 1943.   See more on this below.

How the courts will view the Coronavirus outbreak is yet to be seen however, given neither medical professionals nor the WHO can yet predict how long the outbreak will last, it seems that at present, if it is in fact a force majeure event, it will be difficult to deem it as anything other than continuing indefinitely at this point in time.  However, the effect it will have on a parties’ obligation to return monies paid may depend on the effect of the delay on any individual contract.  The courts are also likely to be alive to opportunistic parties attempting to use the crisis as a chance to get out of their contractual obligations, making business contingency plans and board decisions on the handling of the virus crucial and likely to come under a significant amount of scrutiny in the future.

Frustration

In the event there is no contractual force majeure clause, or any such clause does not extend to the specific circumstances, parties may need to rely on the doctrine of frustration.  However, frustration is rarely permitted by the courts given a party must show that its ability to comply has become impossible and consequently, given it has such a high bar, this route should only be pursued as a last resort.

In order to qualify for frustration three requirements must be met (1) the intervening event must cause the obligation owed to become impossible or radically different from the obligation contemplated at the time of entering the contract; (2) the intervening event must not be caused by either party; and (3) the contract must not expressly deal with what will happen on the occurrence of the intervening event.

Where one party becomes unable to perform due to death, illness or incapacity, the court will look at how long the party is unable to perform for and will consider whether the circumstances genuinely make the contract impossible to perform.  In Blankey [2015] the court held that where someone else can act on the ill party’s behalf to perform the contract, performance will not be deemed impossible.

For contracts entered into from the moment Coronavirus began to obtain significant media coverage, frustration is unlikely given the court is likely to conclude that the inability to perform by reason of Coronavirus was foreseeable.  Where the relevant event is foreseeable frustration will not be available as a defence to breach.

If frustration does arise, the contract will automatically be brought to an end and all parties released from their respective obligations.  Where sums have already been paid under a frustrated contract, the Law Reform (Frustrated Contracts) Act 1943 provides that, where an advance payment has been made before the frustrating event arises the paying party is entitled to receive a return of that money less any expenses incurred by the other party for the purpose of performing their side of the deal.  If any money falls due before the contract was frustrated the paying party is not required to pay such sums although the other party is once again entitled to a sum in respect of incurred expenses.

Summary

Where a parties’ ability to perform has been negatively impacted by Coronavirus to such an extent that it considers it can no longer comply with its contractual obligations, it should firstly check to see whether it can rely on an express force majeure clause.  The wording of any such clause must be considered carefully to see whether coronavirus is covered.  Where it is, parties should consider whether causation requirements are met, whether the impact was beyond the affected party’s control and whether the affected party took all reasonable steps to prevent the impact including whether it took steps to mitigate the loss.

Often contractual provisions provide for formal notice to be given in writing as soon as a party becomes aware of the potential event.  Ensuring such notice is given in a timely manner will assist in a company’s ability to invoke the provision being jeopardized.  Further, whether a company is seeking to rely on force majeure or frustration the inability to perform should be properly documented and retained.

Commercially, it is likely that many businesses will be impacted by the outbreak.  It may be that this provides an opportunity for companies to work together to find creative solutions which may result in agreement to new terms which address delayed performance and future expectations.  What is clear is that Coronavirus is posing novel issues to businesses globally and it is not yet possible to know the full effects it will have on business and trade.  Disputes regarding declarations of Force Majeure and Frustration seem inevitable but understanding your rights, providing timely notices and seeking practical solutions to business interruptions will best protect your business going forward.