The global pandemic caused by Covid-19 has meant that many contractual obligations are no longer being honoured. This ranges from the payment of rent for a small high street shop to fulfilment of multi million pound orders. When the dust settles, parties to contracts may well be looking at their contracts to see what their rights and responsibilities are and if they can recoup any losses.
There are three main issues that parties are likely to be applying their minds to, as follows:
Force Majeure / Events Outside of Control Clauses.
This is strictly a contractual issue. Does the contract contain such a clause? Does it cover the Covid pandemic? Who can rely upon it – is it unilateral or bilateral? What does it say are the consequences if the clause is engaged (usually a suspension of the relevant party’s obligations without penalty)? Bear in mind that generally such clauses are interpreted strictly and the party seeking to rely on the clause must take all reasonable steps to mitigate the consequences of the event in question.
Frustration essentially happens when, without fault by either party, it is impossible to perform a contractual obligation. Reliance upon this doctrine is however, often easier said than done. If frustration is established it discharges the contract so that all present and future rights come to an end. Claims for compensation are made under the Law Reform (Frustrated Contracts) Act 1943, a piece of legislation that may become increasingly popular in the coming months. If the Act does not apply common law claims may also be available.
What if the government makes performance of the contract illegal? In English law a contract is discharged if it is illegal. How does this tie in with government ‘guidance’? What if performance is not illegal if special permission is available and may be granted- does it have to be applied for? These issues are likely to become relevant in any future litigation.
Parties should work through the topics set out above in detail, when considering their rights and obligations. Of course there are also practical points –e.g. Can the affected party afford to pay? If for example they are a bar that has been forced to close and therefore has no income and so cannot pay the rent, if they cannot rely on any of the above there are practical steps that can still be taken such as:
- Negotiate a delay in payment or a payment free period
- Negotiate a payment holiday with the unpaid sums added on to the amounts due in 6 months time
However, care will have to be taken to formally document whatever is agreed so that the parties are clear on their revised obligations, what happens when any grace period ends and also to avoid ancillary issues arising such as waiver or inadvertent release of any guarantor.
This blog was written by: Michael Stewart
DISCLAIMER: Please note that this post sets out the general position under the general law. It should not be acted upon in any specific circumstances without taking specific legal advice as to those circumstances. Also, it should not be relied upon, acted upon or treated as a substitute for specific advice relevant to particular circumstances. If you do require specific advice please contact us for assistance.