As businesses prepare for the escalating impact of COVID-19 in the UK, questions arise as to the financial and legal implications of the potential suspension of "business as usual". Measures designed to contain the spread of the virus, such as travel restrictions, self-isolation, business closures and the cancelling of events are likely to cause significant disruption to commercial activities.

What recourse may you have if your contractual arrangements are affected?

Force majeure

The first consideration is whether the contract contains a force majeure clause. This is a clause which relieves parties from the consequences of non-performance in the event of circumstances beyond their control, typically by allowing parties to suspend performance or terminate the contract.

Force majeure is entirely a creature of contract. It is only applicable if the contract makes provision for it. Therefore, whether an affected party can rely on a force majeure clause will depend on the wording of the clause.

The clause will set out the circumstances in which an affected party may be relieved of the consequences of failure to perform. The drafting will often include a list of force majeure events which result in the parties being unable to perform the contract. Of relevance may be references to epidemics or pandemics, or to quarantines or other forms of government intervention. Alternatively, general or sweeper language may be used, such as to references to causes beyond a party's control or to an "Act of God". The language needs to be carefully considered to determine whether the clause can be relied upon in the context of particular forms of disruption as a result of COVID-19.

The next step is to consider the extent of the protection offered by the clause. The clause will usually set out whether an affected party is entitled to cancel the contract, suspend performance, claim an extension of time, or is otherwise excused from performance.

Importantly, the protection offered by a force majeure clause only kicks in when a party is genuinely unable to perform (rather than it simply being more difficult or expensive to do so). The force majeure event must usually be the sole cause of the failure to perform an obligation.

Frustration

Where there is no force majeure clause, contracting parties may be able to argue that the impact of COVID-19 has "frustrated" the contract.

The doctrine of frustration applies where an event occurs after the formation of the contract, which renders the contract physically or commercially impossible to fulfil, or makes the obligation to perform a radically different obligation from that undertaken upon entry into the contract. The courts treat this as a high threshold to be met. This is because the effect of frustration of a contract is radical. The contract is terminated and the parties are discharged from their obligations.

Getting it right

Asserting force majeure or that a contract has been frustrated is a tricky business at any time, and even more so in the unchartered territory of COVID-19. It is important to take legal advice. Incorrectly asserting force majeure or that a contract has been frustrated may itself amount to a breach of contract, entitling the other contracting party to claim damages or potentially terminate the contract.