The word “unprecedented” has to be one of the most appropriate and frequently used words during the coronavirus outbreak. As result of the outbreak many business are finding themselves in potential dispute positions over contracts which have, for many months, run smoothly.
In this article we will consider how to properly vary, cancel or terminate contractual obligations to reduce risk.
1. Practical tips for ending the contract
A written contract will contain a number of clauses which will allow for termination; parties wishing to terminate must ensure that they comply fully with these terms to avoid a potential claim for breach of contract.
- Force Majeure – a Force Majeure clause can relieve one or more parties from some or all of their contractual obligations when an event happens which is beyond their control. Traditionally such events have been described as Acts of God, war or civil unrest, but the global pandemic could also be deemed to be a force majeure event.
Whether the event which is causing the delay or stopping compliance with contractual obligations, allows a party to rely on the Force Majeure clause depends on the specific terms of the clause.
There is no automatic legal right for parties to delay or terminate a contract as a result of the COVID-19 pandemic; the right to do so because of Force Majeure depends on the express contractual terms.
Frustration – a party could argue that it should be relieved of its contractual obligations because circumstances outside their control mean they cannot perform their obligations. This is known as frustration. If the contract also contains a Force Majeure clause, as discussed above, it is difficult to argue frustration regardless of whether the specific force majeure event is covered.
- Termination – a party can give notice to terminate the contract as set out within the contract’s termination clause. The party wishing to terminate the contract should also ensure that they comply with the contract’s notice clause in respect of how and upon whom a termination notice should be served.
2. Alternatives to termination
The future landscape is ever changing and with no definitive guidance or clear position on when life will return to a form of normality, parties may be reluctant to look at varying contracts whilst not being certain they will be able to comply with any new dates or deadlines.
That said, the presence of a variation clause within a contract will avoid the immediate need to terminate a contract if a party is prevented from fulfilling their obligations as a result of COVID-19.
As with termination clauses, a party wishing to vary their obligations must ensure they comply fully with the requirements of the variation clause as well as other relevant contractual clauses in respect of agreeing a variation.
The variation clause within the contract can be used to postpone performance or alter other obligations which the affected party is no longer able to comply with as a result of the COVID-19 situation.
A party wishing to vary a contract must of course bear in mind that there is no unilateral right to vary the terms and they will need to negotiate any variation with the other parties to the contract.
For further considerations on variation of contract please see the article “Safeguarding Contracts And Dealing With Uncertainty”.
Rob Coleridge, Senior Associate from our Commercial Dispute Resolution Team and Dan Hedley, Partner from our Commercial Team, are hosting a webinar on Thursday 6 May at 2pm where they will be discussing this topic in greater detail. If you are interested in attending, you can register by clicking here, and if you would like to submit questions to them, please send them to Rob.Coleridge@irwinmitchell.com or Daniel.Hedley@irwinmitchell.com