Many individuals and businesses have experienced problems with contracts in the last few months. For many it is difficult to know where they stand. There appear to be 3 ways of dealing with contracts affected by the lockdown restrictions:
- Force majeure
- Equitab le Adjustment
Force majeure, which can be translated as “superior force”, is an unforeseeable and unavoidable circumstance that prevents someone from fulfilling a contract. Examples typically include war, riots and natural disasters. Some contracts will have a force majeure clause. Subject to the wording of the contract, an event (such as the Covid-19 pandemic) will qualify as a force majeure if it is beyond the reasonable control of the affected party; has prevented or hindered the performance of the contract obligations; and the non-performing party has taken all reasonable steps to avoid or mitigate the impact of the event.
Force majeure is a contractual concept and cannot be invoked if there is no relevant term in your contract. If the contract has become impossible to perform, however, it may be possible to rely on the common law doctrine of frustration in order to bring the contract obligations to an end as a result of the current, unforeseen circumstances. In the legal context it is the term used when performance of the contract becomes impossible or the contract’s purpose no longer exists because of a supervening event. So would the outbreak of coronavirus lead to the frustration of a contract? That depends on the nature of the contract that you have; the effect of the outbreak on it and the government measures introduced by it. It may be that, if government measures make performance illegal or the outbreak makes performance impossible, then the contract will have been frustrated.
In reality we would expect that parties, particularly those with an existing commercial relationship, will be prepared to enter into reasonable discussions about the impact of the current circumstances. This is where Equitable Adjustment comes in. It is the modification of contract terms to prevent manifest unfairness such as abatement of sums due or temporary suspension of performance obligations.
In many cases at the moment, what parties will be looking for is for their contractual obligations to be put on hold pending the return to business as usual, not the termination of the contract completely. In these circumstances agreeing a formal variation of the contract would be a better option than terminating it on grounds of frustration. Contracting parties will need to work together to get through this crisis.