One of the immediate issues facing many companies as we enter this new and uncharted territory concerns the performance of commercial contracts. In the past few weeks, we have already seen increasing numbers of companies, irrespective of size, being unable or unwilling to fulfil their contractual obligations.
Many of our clients are now assessing whether they are obliged to carry on with contracts they have agreed. The starting point in answering that question is to check whether a commercial contract includes a force majeure clause.
Any force majeure clause should give some indication of the circumstances in which one or both parties might be excused performance of their contractual obligations. Such clauses are of course coming under particular scrutiny right now. Whether or not a contracting party might be able to rely on a force majeure clause as a consequence of the ongoing and significant disruption caused by Covid-19 will depend on three things: Firstly, the attitude of the contracting parties. Secondly, the specific drafting of the clause. Thirdly, and as a last resort, the determination of the courts.
If a contract does not include a force majeure clause, then the parties may need to rely on what litigation lawyers call the doctrine of frustration. It is highly unlikely that events amounting to frustration will be defined in a commercial contract. A party can rely on the doctrine of frustration in circumstances where a change in circumstances has made it impossible, whether commercially or physically, to perform the contract or make performance radically different. The circumstances in which a party can rely on frustration are narrow and the evidential threshold is high.
Whether circumstances arising from Covid-19 will meet the threshold for frustration remains to be seen, but courts are likely to continue to take a highly fact sensitive approach in making that assessment. At this stage, it is fair to say that the primary issue is likely to be the extent of any state imposed restrictions in the territory where the contract is to be performed and the extent to which those restrictions render performance either impossible or radically different.