COVID-19: Breach of contract implications


26-03-2020

The ongoing epidemic poses significant risks to businesses with restrictions on movement resulting in disrupted supply chains, cancellation of events, and the closure of many services as a consequence of worker absence rates.

What are the legal issues that arise?

English law contracts are, in principle, absolute. A failure to perform a contractual obligation will leave a business potentially liable to a breach of contract claim. The two key exceptions to this rule are:

  1. force majeure clauses in a contract; and
  2. the common law doctrine of frustration.

If a business is unable to perform a contract, these are the questions they should be asking:

  • Is there a force majeure clause in our contract?
  • If there is, does it specifically list ‘epidemic’ as a force majeure event?
  • If ‘epidemic’ is not listed, could it be covered by the general force majeure wording in the contract
  • Has the epidemic actually prevented contractual compliance or has it just made compliance more expensive (the Courts are reluctant to allow non-performance simply because it has become uneconomic)?
  • Have all reasonable steps been taken to mitigate or avoid the effects of the epidemic (businesses will need to produce evidence of this)?
  • What does the contract say happens in the event of a force majeure event – does it terminate the contract or is performance just suspended?
  • Does the contract specify that a notice has to be served within a particular timescale to rely upon a force majeure clause?

What if there is no force majeure clause in the contract?

If there is no force majeure clause in your contract (or no written contract at all), businesses will need to rely upon the common law doctrine of frustration. This provides that a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.

Whether a business can successfully rely upon a force majeure clause or the common law doctrine of frustration will involve an analysis of the facts in each case; the same event may allow one business to avoid a breach of contract claim but not the next. As a consequence of this uncertainty and the relatively strict notification time limits imposed by insurers, all businesses should also review their insurance policy. Businesses should ensure any actual or potential claims they may have are notified to their insurance company as soon as possible.

This post was written by Heidi Berry, a Commercial Disputes Lawyer at Price Bailey. If you have any questions regarding where you stand with regards to this, or you would like some further support or advice on commercial law matters, you can contact Heidi via the website.

 

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

 

Price Bailey is a leading firm of business advisers and accountants with eight offices throughout East Anglia, London and Guernsey serving local SMEs, private clients and regional, national and international businesses.

Price Bailey Chartered Accountants