19 March 2020
With the outbreak of the Corona virus and the impact on industry as a result of the measures introduced both nationally and internationally to slow the spread of the virus, businesses are rightly looking at ways to protect themselves, as best they can, to avoid becoming a victim of the pandemic.
For most businesses, this will involve exploring ways in which existing contractual obligations can be varied or even terminated. Equally, a business may wish to prepare for the prospect that others may wish to vary or terminate the contract with them.
It is important to avoid ‘knee jerk’ reactions because the consequences of getting it wrong may have serious financial implications:
- Communication – “Keep Calm and Carry On”
The wheels of commerce must continue to turn so keeping the lines of communication open with the other party and pro-actively addressing ways in which each can help the other, may go a long way to avoiding an unwanted fall out both commercially and legally. Caution should still be exercised to avoid a breach of the contract whether actual or anticipatory; inadvertently varying any terms of the agreement or waiving any rights of legal redress.
- Contract Terms and Force Majeure – What does the Contract say?
If the contract was verbal or even formed and concluded over piecemeal correspondence, consider whether the terms, express or implied, can be ascertained from the communications. An aid to this is to consider what was in reasonable contemplation of the parties.
Check whether the contract provides the parties with any flexibility to vary the terms either unilaterally or by agreement through re-negotiation and what are the circumstances entitling a party to terminate. For instance, it could be as simple as providing written notice.
Written contracts, usually standard term contracts, often include a force majeure clause. Force majeure is not an implied term and whether such a term would include the Corona virus pandemic will turn on the interpretation of the contract. A contract may define force majeure as an unforeseeable event and/or may use specific examples. A Court will not readily treat the Corona virus as a trigger for a force majeure clause if it sits outside the scope of the contract.
- Frustration and Subsequent Impossibility
If the contract is physically or commercially impossible to fulfil, in other words shifts the obligation into something radically different to what was required the agreement may be frustrated enabling the parties to treat the contract as void.
In the absence of a force majeure clause, frustration will operate within narrow confines. A frustrating event is one which:
- Is not due to the fault of either party,
- Takes place after the contract was formed,
- Is beyond the reasonable contemplation of the parties and goes to the root of the contract,
- Renders performance impossible, illegal or radically different
Under the Law Reform (Frustrated Contracts) Act 1943, if a Contract is frustrated money paid before the frustrating event can be recovered and money due before the frustrating event, but not paid, ceases to be payable.
In conclusion, it is prudent in the current pandemic to avoid rash decisions. As sympathetic as a Court may be in what are challenging times for many businesses, a cautious, co-operative approach is advised.
