Contributed by Slaughter and May
How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?
Businesses operating in the United Kingdom are faced with the same challenges as have been observed around the world. In addition to the obvious direct impact which the Covid-19 pandemic is having on global supply chains, consumer demand, businesses' ability to fulfil their contractual obligations, and businesses' cash flows (in particular in the leisure, travel and hospitality industries), the wider economic background and the turmoil seen in the financial markets are likely to lead to secondary impacts of some significance. By way of example, a number of businesses may be faced with difficult negotiations with lenders following breaches of financial covenants occurring as a result of this turmoil and/or sudden reduction in cash flows. It is likely that the Covid-19 pandemic will have implications for the vast majority of businesses, and the scope of these remains hard to ascertain at this early stage.
In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?
The fundamental principle which underpins English contract law is that parties must be held to the bargain they agreed when they struck their contract. If a party chose to enter into an onerous contract, it cannot seek to extricate itself from it because that contract is onerous to perform. English law does not protect parties who have struck bad bargains.
However, there are some exceptions to this general principle, including in particular the doctrine of frustration. Under that doctrine, it may be possible for a contract to be discharged if an event or circumstance comes to pass which had not been contemplated by the parties when they entered into the contract, and which renders any further performance of the contract impossible, illegal or radically different from what the parties had contemplated.
Thus, if the Covid-19 pandemic results in a contract being impossible to perform, or if performing the contract would be illegal (for example by being in breach of mandatory instructions issued by governments in response to the pandemic), the affected party may in certain circumstances be entitled to argue that the contract is frustrated: in such a scenario, the parties' obligations under the contract would be deemed to be discharged. However, the English law doctrine of frustration is of very limited application, and is only likely to be relevant in a minority of cases.
In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?
In case of partial impossibility to perform its contractual obligations caused by an external event beyond the control of the parties, the affected party may terminate the contract in case of partial performance would not suit the counterparty requirements. Other than that, the contract would remain valid and the counterparty would be entitled to appropriate partial relief from compliance with its obligations.
If yes, what considerations should be borne in mind by such parties, in particular in relation to:
Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)
Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)
Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)
As noted above, the fundamental principle under English contract law is that parties must perform their contracts in accordance with their terms. As such, where the doctrine of frustration does not apply, parties will (except in rare cases) only be entitled to claim relief from performance if their contracts expressly provide for it.
Modern English law contracts typically include a "force majeure" clause in one form or another. This may be applicable where a party's performance of the contract is affected by an external event beyond that party's control, such as the Covid-19 epidemic.
- Notification: Parties will typically only be entitled to claim relief under a "force majeure" clause if they provide prompt and suitable notification of the relevant event impeding or preventing their performance to their contractual counterparty.
- Causation: "Force majeure" clauses will typically only apply where a party's performance of its contractual obligations is directly impacted by the relevant event of "force majeure". The occurrence of a relevant event, in itself, will not generally be sufficient to engage the contractual protection mechanisms.
- Mitigation: Parties will often be required to demonstrate that they took steps to mitigate the impact of the "force majeure" event. Where there is more than one way for a party to perform the contract, this may require the party to make use of an alternative means of performance where the preferred means of performance is affected by the relevant "force majeure" event, but the alternative means of performance is not.
Thus, where a business is concerned that its performance under an English law governed contract may be rendered impossible or impeded as a result of an external factor beyond its control, such as the Covid-19 pandemic, it should carefully scrutinise the precise terms of its contracts, with the aid of legal counsel, to determine whether it might be entitled to relief from performance, and what requirements it may need to comply with for any such relief to be granted.