Contractual Legal Escapes during the COVID-19 Era
Covid-19 continues to impact all aspects of our lives. With disruptions to supply chains and business generally, this has led to a rapid increase inqueries concerning parties’ obligations in contracts. We are frequently asked whether there are any contractual clauses which can excuse parties from performing obligations which are unable to be metor completed in full as a result of the impact ofCovid-19.
Force majeure clauses are those which have the ability to alter the parties obligations and/or liabilities IF an extraordinary event or circumstance, beyond the parties control, prevents the fulfilment of any of their responsibilities under the contract. The clause must have been included in the contract in the first place and it will depend on the particular wording used. It is for the party seeking to rely on the force majeure clause, to satisfy a Court that it is entitled to rely on and obtain any relief due to its non-performance or late performance.
Force majeure clauses usually include events such as war, terrorism, hurricanes, fires, earthquakes etc. If pandemics or epidemics are specifically included, or there is a suggestion that the list is non-exhaustive, then Covid-19 could definitely be covered.
The Courts are likely to be generous in interpreting the precise wording when dealing with genuine difficulties experienced by parties, if that party can show that circumstances are out of their control and that the issues encountered could not have been mitigated or prevented, then the Courts are likely to show some lenience.
The party seeking to rely on force majeure must comply with a notice of its intention to rely on the clause within a specific timeframe, as stipulated in the contract.
The usual remedy if force majeure is invoked is that the party will be excused from its obligations and/or liability under the contract, without any damages becoming payable.
If there is no force majeure clause, then other provisions must be looked at, such as the doctrine of frustration.
Frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed. This may be due to the circumstances in which performance is called for, being rendered radically different from that which was undertaken by the contract.
“… there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.” Davis Contractors Ltd. v. Fareham Urban District Council  A.C.696
“Frustration of a contract takes place where 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 law declares both parties to be discharged from further performance.” National Carriers Ltd v. Panalpina (Northern) Ltd  AC675
The purpose of the doctrine is to provide an escape from injustice, where the performance which would result from enforcement of a contract in its literal terms, after a significant change in circumstances, would be unfair. A frustrating event must take place without blame or fault on the side of the party seeking to rely on it and must be some outside event or extraneous change of situation. The doctrine is not to be lightly invoked and must be kept within very narrow limits. Frustration brings the contract to an automatic end.
With no immediate prospect of the Covid-19 pandemic coming to an end, our advice to businesses is to take prompt steps to evaluate and reduce risks in all commercial contracts.
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