COVID-19: Impact on contract obligations

Many businesses are affected by COVID-19. One of the questions that worries businesses is how COVID-19 affects their contractual obligations.

The general rule is that parties are required to perform their obligations and will be potentially liable to their counterparties for a failure to do so.

But there are two exceptions to this general rule and we will consider them, in brief, below.

  • Force major clause in a contract
  • Common law doctrine of frustration

Force major clauses differ and the particular clause needs to be considered on its own merit and context. The main factors to consider include:

  • definition of a force major event and whether COVID-19 epidemic is covered by this definition. If it is not covered, whether this epidemic falls under general force major wording. You might need to seek a legal advice as there are many factors to consider here.
  • whether COVID-19 has prevented or hindered a party from performance of the contract;
  • whether a party has taken reasonable steps to mitigate the effects of the force major event;
  • notice requirements;
  • consequences of establishing a force major event.

If there is no force major clause in a contract, parties can apply the common law doctrine of frustration. Under this doctrine, a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.

The bar, here, is very high and a very limited number of cases falls under this doctrine.

Relying on these two exceptions can be risky as if a party gets it wrong and refuses to perform its obligations under a contract when it is not entitled to do so, it can become liable to a counterparty for a repudiatory breach of contract. We do recommend that you seek full legal advice.

Our teams of experienced solicitors are here to advise you further. Please contact Svetlana Gooderham in our corporate team for more information.

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