A common theme amongst many of the distressed businesses we are advising is the degree to which contractual obligations can be avoided.
Common areas of discussion with these businesses include an inability to benefit from their leases or an inability to be able to afford to pay for stock ordered under a pre-coronavirus purchase order. During this period of intense uncertainty and disruption, anything which might enable a company to reduce its payment obligations is welcome relief.
This article sets out two potential remedies, albeit neither provides certainty that contractual obligations can be avoided in all circumstances.
A sentiment familiar to us all at the moment, “frustration” is also a common law doctrine which might apply to a contract now impossible or illegal to perform through no fault of the contracting parties.
For an event to be “frustrating” in a legal sense it must be so fundamental that it strikes to the root of the contract and is entirely beyond what was contemplated by the parties when the contact was made.
If a frustrating event occurs the parties are no longer bound to perform their obligations, and the contract is brought to an end. On that basis, government-imposed coronavirus restrictions could give rise to the frustration of commercial contracts. An example might be a contract whereby one party has been retained by another to stage a public event on a specific date, the delivery of which is now illegal under emergency legislation.
That said, contractual frustration is a high bar to meet and coronavirus is by no means a “get out of jail free” card for commercial contracts. It will not apply where the contract is simply more expensive to perform, where market conditions change unexpectedly, or where a seller is let down by its own supply chain. It may also not apply where the contract contains a force majeure clause – more details of this follow below.
Whilst in principle frustration could apply to property leases (and we are seeing tenants, large and small, arguing just that) there are currently no reported English law cases where a lease has been found to be frustrated. We expect this to be an area of law which will be hotly argued and contested in the fall-out of this crisis.
Force Majeure clauses are commonly found in the boilerplate towards the end of commercial contracts and standard T&Cs. By contrast, they are rarely seen in commercial or residential leases.
Designed to anticipate how the parties will deal with unexpected events arising in the life of a contract, Force Majeure clauses are agreed by the parties when they make the contract and have contractual force. As such, Force Majeure clauses vary widely in scope and effect.
Some allow contractual obligations (including payments) to be suspended or for the contract to be terminated. The Force Majeure trigger event might be drafted broadly or narrowly and so determine whether this pandemic allows the clause can be successfully invoked. Some Force Majeure clauses require certain steps to be taken before they take effect, such as notices to be served and mitigation plans agreed.
In short, the devil is in the detail and the drafting is key. As with frustration, an unexpected change in market conditions making a contract unprofitable, or supply issues created in the upstream supply chain, is unlikely to constitute Force Majeure.