April 3, 2020
In addition to the obvious problems that will be caused by reduced or non-existent revenue, many businesses may also run into trouble with their contractual obligations to third parties, such as customers, suppliers, agents and distributors.
Many of these contracts will be affected by the current crisis, which will most likely result in legal consequences if contractual obligations are not met.
For businesses that are struggling with the current pandemic, two legal concepts may help when it comes to dealing with contractual legal obligations.
Most written contracts usually contain a “force majeure” clause which specifies the circumstances in which the parties will be excused from their contractual obligations in some way, following the occurrence of certain events. Such circumstances often include a pandemic, such as Covid-19.
However, before relying on a force majeure clause, you need to consider a few points:
is a pandemic included as a force majeure event?
has the outbreak caused your inability to perform under the contract?
have you taken reasonable steps to avoid the impact of the pandemic?
you must ensure that you give appropriate notice to the other party in accordance with the contract.
Some force majeure clauses may suspend obligations for a period and then, after the expiry of that period, allow for termination of the contract.
In the absence of a force majeure clause, you may be able to rely on the common law concept of ‘frustration’.
The concept of ‘frustration’ only applies in certain restricted circumstances, where the performance of a contract has become impossible. However, ‘frustration’ generally offers only limited legal remedies to the parties.
‘Frustration’ may allow a business to terminate the contract immediately on the occurrence of the frustrating event, in this case Covid-19, thereby releasing it from its contractual obligations.
However, the impact of the pandemic must be such that it renders the contractual obligation physically or commercially impossible to fulfil, or alternatively that it transforms the obligation into something radically different from what was intended.
Businesses that are running into difficultly with their contractual obligations because of the coronavirus pandemic need to urgently consider their contractual obligations to third parties. Investing in legal advice from a lawyer with appropriate expertise may well pay dividends further down the line.
This has been produced in conjunction with the Law Society.
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