The rapid spread of the COVID-19 virus throughout the world and the restrictive measures which may or had already been implemented present serious issues for British and international businesses working either in the UK or under the jurisdiction of the English law. This is in particular the case when it comes to the legal matters, which can be quite complicated, especially in an unprecedented circumstances of the global pandemic. During this time we will be publishing a series of articles to answer the most commonly asked legal questions arising out of the current state of affairs. We provide below the first article in these series.
Non-performance of an agreement due to the Covid-19 is a force majeure?
In the present circumstances a party to an agreement may seek to suspend or altogether refuse to perform its obligations under an agreement for reasons of an apparent force majeure event taking place. However, as always, the legal position is not that simple.
The effects of the pandemic and the associated measures taken by the governments to mitigate or alleviate its impacts, such as border closures, mandatory business closures and quarantine measures are the kind of events that may be considered to represent force majeure circumstances, which may justify a failure by a party to perform its obligations under the terms of that agreement.
What counts as a legitimate force majeure event and the consequences of the impact of such events on the liability of the parties’ to an agreement may be governed by the terms of the agreement between them or, in the absence of the relevant provisions to the agreement, the law generally, which may complicate the position even further.
In the absence of the relevant provisions in the agreement in question, the English law principle of frustration of contract will apply. This principle provides that if an event occurs, which is beyond the control of the defaulting party and renders the agreement either impossible to fulfil or makes the performance by such party radically different from what was originally contemplated, the agreement can be set aside and such party, which would have otherwise been in breach, will be excused for its non-performance.
Originally, the typical consequence of the agreement being set aside in this manner was that “the loss would lie where it fell”, i.e. if a payment was made for goods or services, which were only partially delivered due to the frustrating event taking place, this payment could not be recovered unless a total failure of consideration had occurred, i.e. no services were provided whatsoever. This of course could result in one party being unjustly enriched. This therefore had to change and was largely rectified by the passage of the Law Reform (Frustrated Contracts) Act 1943. This act provided that if the agreement is of the kind to which the act applies, money paid before the frustrating event can be recovered, save that the defaulting party will usually not be required to repay the costs it incurred for out of pocket expenses.
If the relevant agreement contains a force majeure clause, it must be considered as a starting point in determining the impact of the force majeure event. Typically, such clauses allow a party to suspend its performance under the agreement for a certain period after the force majeure event takes place and/or to terminate the agreement if the force majeure event does not cease within a specified time. What constitutes a force majeure event will normally be defined in the agreement. Epidemic or pandemic are often specifically included in this definition.
It is important to note that, in either case, for a party to be excused from liability, the relevant force majeure event must be the only effective cause of the default by such party. If the effects of the relevant event will only make it more costly or otherwise less convenient for a party to perform its agreed obligations, this will usually not be enough to justify termination of the agreement and to excuse it from liability.
Force majeure clauses may also be assessed in accordance with the Unfair Contract Terms Act 1977, which, among other things, prevents a party from excluding or restricting its liability for its breach of contract unless such term is considered to be reasonable. What is considered reasonable in each set of circumstances must be accessed by the Court. However, clauses which permit a party to excuse its liability by relying on the event, which is in fact not the cause of its non-performance, are likely to be considered unreasonable.
*The above article is for information purposes only and should not be construed as legal advice. If you require legal advice or assistance about any commercial or employment issues identified above, please contact us.