FAQs - Does Covid-19 release me from my contractual obligations?

The law offers contracting parties limited relief from contracts when they become difficult or impossible to perform.

This includes frustration and force majeure.

It is important to bear in mind that a contract is simply an agreement between the contracting parties.  It isn't necessarily written, and if it is then it may be recorded as an exchange of emails. Any agreement, even a lengthy legal contract, can be changed so long as the parties agree.  Accordingly there may be scope for an agreement on how the parties, working together, can address any Covid-19 issues, including where the original agreement was never recorded, wasn't signed or now can't be found.

When is a contract frustrated, and what does that mean?

Frustration is a common law principle that automatically brings a contract (and any obligations under it) to an end when some event occurs which:

• is unexpected;

• is beyond the reasonable control of the parties; and

• makes performance impossible or renders the relevant obligations materially different from those contemplated by the parties at the time when the contract was made

The fact that it may become more difficult or costly to perform the contract will not itself amount to frustration as the following examples show:

• Temporary interruption. A contract which expressly requires a particular individual to be available or work to be performed at a particular time (or within a stated period) would not be frustrated if a substitute could be sent or there is scope to do the work later. Simple delay will not frustrate the contract.

• Method of performance. A contract which provides for some face to face interaction (such as a performer, teacher or care provision) would not be frustrated if an alternative method of performance is available, and the difference is not sufficiently fundamental.

• Illegality. Where there is a change of law it will be necessary to look at the particular circumstances and whether the change is permanent or temporary (so as to delay performance) or whether an alternative method of performance could be appropriate.

What is the effect of frustration?

The contract is automatically terminated, further obligations are released and the parties can recover monies paid, subject to an allowance for the actual work done or reasonable expenses already incurred.

What is force majeure?

In view of the limited scope of the frustration principle parties may include a 'force majeure' clause in the contract which will seek to deal with unexpected events outside a party's control. The impact of a force majeure clause will depend entirely on its terms, and may specify:

• what events will qualify, e.g. Act of God, war, terrorism.  Some clauses, but not all, may include epidemics and/or pandemics. In its earlier stages Covid-19 was not classified as a pandemic so may not have qualified as a relevant force majeure event at that stage.
• what happens if there is a force majeure event, which may include any of the following:

-   performance to be suspended or delayed or deadlines to be extended;

-   non-liability for the failure to perform; 

-   a right to terminate the contract, which could be restricted to just the party not subject to the force majeure or allow any of the contracting parties to terminate; and/or

-   what happens once the contract is terminated, as there may be continuing obligations on the parties which are stated to continue, for example payments yet to be made, confidentiality, post termination restrictions, etc.

Force majeure is a contract provision.  It is either in the contract, in which case the term needs to be applied and followed; or it isn't, in which case it can't help (although there may be limited circumstances in which force majeure could be implied) and a party's failure to perform will need to be considered as a potential breach of contract.

Are there any contract terms I must look out for?

Each contract will need to be considered on a case by case basis.  Some terms to consider, if you have them in your contract, are as follows:

• Service specification.  This sets out what each party is required to perform in order to comply with (and not be in breach of) the contract, and may include key performance indicators (KPI) and other targets. The specification may be detailed, or it may be particularly vague. Understanding what you have to do is key to understanding where any potential breach of contract will arise.

• Price adjustment clauses.  This may allow account to be taken of the increased difficulty in performing the contract and for the cost of doing so to be passed to the party paying.

• Change of law clauses.  This may allow for termination, price adjustments or changes to what a party needs to perform.

• Limitation and Exclusion clauses. In the face of a potential breach parties will need to take note of their potential exposure for damages.

• Notice and Termination clauses.  If the contract allows for notice to be given to terminate the contract, this may be preferable to being in breach for non-performance. However, it is important that parties understand their obligations on termination, for example full payment may still be due even if the contract is ended early.