Covid 19 has had a devastating and frustrating effect on business’s ability to complete projects on time. What does the law say on the effect the pandemic has had on late completion liquidated damages clauses?
Party A agrees to set up and install a high tech security system for Party B. It is agreed that the project will complete in March 2020. It is agreed that Party A will pay Party B £100 for each day the project is not completed. When Covid 19 spreads across the UK causing havoc and disruption Party A struggles to complete the project on time. Eventually in July 2020 the project is complete. Party B issues Party A with an invoice for £12,000 due to the late completion. Party A tells Party B they do not have pay as the delay was entirely the fault of the pandemic. Are they correct?
There are 2 instances in which Party A can avoid the liquidated damages clause. If the contract specifically discusses what should happen in the event a party is unable to fulfil an obligation under the contract due to events beyond its control then we simply follow what the contract says. The contract may expressly refer to a pandemic or epidemic both of which are types of what is known as a ‘force majeure’ and can be a way out for Party A.
If the contract is silent on this Party A has one more get out of jail card known as ‘frustration’. A contract is said to be ‘frustrated’ if something happens after the contract begins that is outside the control of the parties making it commercially or physically illegal or impossible to perform the contract. Or if what has happened means the performance of the contract will be so radically different to what was intended to the extent that it is considered unfair to make the party perform the contract. As one might expect it will be rare for any of these scenarios to apply. In the present example construction was not banned by the government. It would not have been illegal to have workers on site. It is unlikely that it would have been commercially impossible either although it may have cost Party A a lot more money than it had intended.
It may be frustrating to Party A but in most cases it will have to honour the liquidated damages claim if it cannot rely on a force majeure clause or the doctrine of frustration.
There may be situations in which a contract can be said to be frustrated and all will depend on the specific circumstances. If a contract is frustrated, the contract is brought to end – automatically; sometimes with unintended consequences so a party should seek advice before invoking the doctrine of frustration.
This blog was written by: Allan Kornbluth
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.