In light of the novel coronavirus (COVID-19), many businesses are confronted with questions about the legal and regulatory implications. As these effects continue to spread and become more severe, companies are assessing their contractual obligations in preparation for delayed or cancelled performance. At BOYNECLARKE LLP, we have received a number of questions and expressions of concern regarding the impact of COVID-19 on contractual rights and obligations. This brief post will outline a couple of key Q & As that will hopefully assist you. Should you have any further questions regarding your particular circumstance, please do not hesitate to reach out to one of our Business Law Lawyers.
I need to amend/terminate our contract – How can this be done?
Before we get into the legal principles, it is important to note that any contract can be amended or terminated by agreement of all of the parties. Provided everyone is in agreement, the terms of the original contract can be changed, or the contract terminated, and the parties can have it properly documented by signing an amendment.
It is important to have your lawyer to draft an amendment or to speak with your lawyer prior to entering into an amendment in order to ensure that there are no other unintended consequences of the change.
What is a Force Majeure clause?
A Force Majeure clause is a term found in many commercial contracts. It is intended to limit liability of one or more parties to the contract if unforeseen events, outside the control of the parties, delay performance of the contract or prevent performance entirely.
If there is a Force Majeure clause in your contract, it cannot be automatically triggered and relied on. There is usually a factual analysis on a case by case basis in terms of whether the clause applies or not, based on the surrounding circumstances, in our current case, the COVID-19 pandemic. Some things you will need to discuss with your lawyer include:
- Do you have a force majeure clause in your contract?
- When did you notify the other party(ies) of your intention to rely on such a clause? And what actions have you taken since?
- When was the contract entered into?
There is no Force Majeure clause in my contract – What else can I do?
There are other principles of law that you may be able to rely on, should you not have a Force Majeure clause in your contract. These include the common law doctrines of frustration and impossibility.
- Frustration. Frustration is a concept that allows parties to a contract to be relieved of their obligations in a contract when an unforeseeable event results in contractual obligations becoming substantially or fundamentally different from those contemplated by the parties for reasons beyond a party’s control.
- Impossibility. Impossibility will excuse a party’s performance only where the impact of an unknown or unforeseeable event makes the performance of the contract objectively impossible. Where impossibility is as a result of financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of the contract cannot be excused.
The other party wants to cancel / cannot continue with our contract – What should I do?
The reliance on a Force Majeure, frustration or impossibility claim will often lead to disputes. These disputes can be negotiated, or litigated in due course; however, in the interim, you need to continue your business and re-coup your operational and financial position in the best way possible. This may mean you need to:
- Negotiate with the other party – come to an agreement on an interim basis, without ruling out any claim you may have under the terms and conditions of your original contract.
- Reduce the volume of services and/or goods you procure under the contract if your demand has dropped. This may involve revising your forecasts immediately.
- Engage new suppliers or counterparties if the other party completely bails on their obligations under your original contract.
- Defer performance of the contract entirely, for the length of the delaying event (COVID-19).
This post is for informative purposes only and is not legal advice nor intended to be read as legal advice.