Can I (or the other party) get out of an onerous contract because of coronavirus?
Generally, a party must comply with the written obligations in a contract unless it has an express right not to do so or to terminate the contract altogether. However, the unprecedented nature of coronavirus gives rise to two possibilities for non-performance and avoiding legal liability:
- Force majeure (FM) – if the contract contains a written clause and coronavirus comes within the definition of FM, there may be grounds for avoiding liability in the event of non-performance or delayed performance. If there is no FM clause, FM cannot apply at all. Although an FM event will not automatically terminate the contract, in many clauses, if the FM event goes on for a specified period, the other party can terminate (without liability on either side).
- Frustration – exceptionally, where an event arises after the date of the contract which makes performance impossible or “radically different” from what the parties had in mind in mind, the contract will automatically be terminated and neither party is obliged to perform any further obligations.
Force majeure and frustration are exceptions to the rule that contracts must be performed and so are monitored strictly by the courts.
Checklist – other points to consider with commercial contracts
- Review the terms carefully – are there any rights to terminate early or cancel?
- Payment – protect yourself by securing payment as soon as possible – consider requesting deposits, payment on completion or seeking personal guarantees from a company’s directors.
- Amendments to the contract – in the event that you wish to relax performance terms for the other party, ensure that the amendment is agreed and recorded in writing so that the underlying obligations are not lost altogether.
- Retention of title clauses – where high value goods are being supplied, ensure that a retention of title clause is included and, if customers have solvency problems, that any claims are notified to the relevant insolvency practitioner as soon as possible.
- Insurance – check whether you have any business interruption or credit insurance in place which might protect your business in the event that operations are severely disrupted or you suffer significant bad debts.
- Termination – check that you have suitable legal grounds for terminating an agreement and document the reasons for doing so – if you terminate in circumstances where you are not entitled to do so, that is in itself a breach of contract entitling the other party to terminate and claim damages. If terminating for breach, specify the breach and follow the contractual termination procedure strictly.
- Don’t delay – a termination right can be lost by delay or allowing the contract to continue to be performed. If you do not wish to terminate immediately write to the other party to let them know that you are reserving your rights and explaining why and for how long.
Taking Action – we will be happy to advise you on specific contracts and/or to undertake a general review of a range of contracts to help identify those contracts that could be terminated early and without liability by you or the other party.