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Coronavirus and Commercial Contracts

As the coronavirus pandemic continues to cause major disruptions to businesses across the UK, it is important to consider the contractual issues facing many businesses and individuals as they try to manage the impact of coronavirus. 

The contractual position 

As a general rule, if the performance of a contract becomes more difficult or even impossible, the party who fails to perform is liable to pay damages to the innocent party. 

However, there are two exceptions to this rule:

  1. The operation of a force majeure clause; and 
  2. The common law concept of frustration. 

Force Majeure clause 

Force majeure refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract. If one of the events listed in a force majeure clause occurs, the clause will usually state what the parties must do next. This may include:

  • Non-liability: once the force majeure clause is triggered, neither party may be liable to the other for any losses which arise directly or indirectly as a result of the force majeure event.
  • Obligation to mitigate: the non-performing party may be required to take reasonable steps to avoid the event or the impact of its consequences. 
  • Right to terminate: some force majeure clauses allow either or both parties the right to serve notice and terminate the contract.

Your obligations under a force majeure clause and the remedies available will vary depending on the drafting of the clause. It is therefore important that you review the contractual terms carefully when seeking to rely on a force majeure clause.

Doctrine of Frustration

In the absence of a force majeure clause, a contract may be discharged on the ground of frustration. A contract may be ‘frustrated’ when an event occurs, without fault of either party, which renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract. 

If a contract is frustrated, it is automatically discharged and the parties are excused from their future obligations. The remedies available are often limited and inadequate. It is therefore important to seek specialist advice when such an event occurs. 

This article is only intended to provide an overview of some of the issues which may affect commercial contracts. It is not intended to cover contracts governed by different areas of law e.g. employment law, which will have specific issues and may be subject to additional statutory provisions. 

If you would like our assistance in reviewing your contractual obligations and advice on issues relating to coronavirus,  please contact Mark Loosemore, Senior Partner and Head of Commercial at Loosemores Solicitors via LoosemoreM@loosemores.co.uk or call 029 2080 3119.

For more information about the coronavirus visit Public Health Wales.

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