Contracts and Covid-19: Your Rights and Obligations

Covid-19 is very likely to be affecting your business in many different ways and you may be faced with difficult decisions in relation to goods and services requested by you or promised by you and termination or variation of those contracts.

The question is whether those goods or services can be delivered and if the answer is yes, this will not affect the rights and obligations under the contract and any failure to do so may amount to a breach of contract resulting in the non-defaulting party seeking damages for non-delivery.

However, you may be able to avoid liability for breach of contract in the following circumstances:

1. Force majeure clauses

The contract terms may have envisaged some event, beyond the control of the parties, which may affect the performance of the contract and the clause will deal specifically with how the parties’ obligations are affected by those event envisaged.

The wording of the force majeure clause will have to be checked carefully to see what events are covered and the effect of such an event on the performance of the contract. For example, a pandemic may not be listed as an event meaning that the parties may not be able to rely on the force majeure clause. Even if the situation is covered by a force majeure clause, other requirements may still need to be satisfied to constitute force majeure and this will need to be considered carefully.

2. The common law doctrine of Frustration

A contract may automatically be deemed terminated and the parties are released from any future obligations where a ‘frustrating event’ occurs and the following criteria are met:

a) The ‘frustrating event’ occurs after the contract was formed;
b) The ‘frustrating event’ Is so fundamental that it goes to the root of the contract and is entirely beyond what was contemplated by the parties at the time of contract formation;
c) The ‘frustrating event’ is not the fault of any contracting party; and
d) The ‘frustrating event’ renders the performance of the contract impossible, illegal or makes it radically different from that contemplated by the parties at the time of contract formation.

‘Frustrating events’ may include scenarios where there is:

– Non-occurrence of an event
– Destruction of subject matter
– Illegality
– Outbreak of war
– Significant delay or interruption

What are the effects if a contract is deemed to be frustrated?

If frustration applies, the contract is automatically terminated and the parties are released from any future obligations. Note, however, that if a party has incurred contractual obligations before the frustrating event, it remains bound to perform them. For example, if a business is required to pay a sum of money in monthly instalments, all payments that have fallen due up to and including the date of the frustrating event must be paid as normal.

The paying party is only entitled to recover pre-payments if there has been a total failure of consideration. As neither party will receive a benefit from the contract, the Law Reform (Frustrated Contracts) Act 1943 provides for recovery of monies paid before the contract was discharged, subject to an allowance (at the Court’s discretion) for expenses incurred by the supplying party.

In deciding whether to allow the retention of any advance payments, the court will consider whether the expenses incurred may be recovered in an alternative way. Case law suggests that the correct approach to calculate the amount allowed for expenditure: will take into account:

a) The value the benefit to the party receiving the goods/ services and this becomes the upper limit of award
b) Within the limit from (a), decide what sum is just with reference to fairness, the effect of frustration, and the expenses incurred by the party receiving the benefit.

Should you require any assistance in considering your contractual rights and obligations, in particular in light of Covid-19, please do not hesitate to contact Akanshi Agrawal on 01702352511.

Author: Akanshi Agrawal