THE EFFECT OF COVID 19 ON CONTRACTUAL OBLIGATIONS

The coronavirus pandemic is preventing many businesses from performing their contractual obligations. This blog looks at some of the legal issues involved

Covid-19 & Contractual Obligations

Some businesses may face disruption in the supply chain due to the coronavirus crisis. Others are forced to cease operating, as directed by government.

They may therefore be unable to fulfil the terms of a contract or be forced to end the contract. This can create legal disputes over contractual agreements.

The courts in Ireland are slow to move from the general view that a contract is enforceable. This is so, even if it causes one party additional expense or difficulties which were not foreseen before this pandemic.

There are some exceptions to the rule, which are likely to be invoked over the coming weeks and months. We recommend you seek legal advice. This is particularly important in the following two cases:

• If you are accused of breach of contract and you are relying on Force Majeure or Frustration as the grounds for your defence
• If you are pursuing another party for breach of contract and want to object to their reliance on Force Majeure or Frustration as the grounds for their defence

Force Majeure & Contractual Obligations

Force majeure contract provisions relieve one or both parties from fulfilling their contractual obligations when circumstances outside their control arise. Many commercial contracts have a force majeure clause. This clause will clearly set out what type of event is considered to be force majeure, pursuant to that contract.  It may be a broad ranging provision referencing an unforeseen event beyond the control of either party. Or it could be specific and include “Acts of God”, natural disasters, wars and/or pandemics.

The World Health Organisation (WHO) has declared that the current spread of Covid-19 around the globe is a pandemic.  The terms of a force majeure clause may be broad or include pandemics. If so, this may be used to defend non-performance of a contract by the party unable to perform its obligations. It is likely that a clause including disease or an Act of God could also be invoked. But this will depend on the wording of each clause and will be open to dispute.  It generally must be shown that the event, such as the coronavirus, is the cause of the non-performance. It won’t be sufficient to show that it’s made the performance of the contract more difficult or more time consuming.

Contracts often provide for notice to be given if a party intends to rely on a force majeure clause. So, you need to check your contract, if your company is already unable or will soon be unable to meet the contractual obligations. It’s important to review the specific terms of the contracts and comply with the relevant notice provisions.

 

Frustration & Contractual Obligations

A contract may not have a specific force majeure provision or the provision may not extend to the current circumstances. If so, it may be possible to argue that the contract has been ‘frustrated’.

This could arise if the contract becomes impossible to perform or the subject matter no longer exists. An example of this could be a contract between a musician and a music venue for a concert. This contract has now become impossible, due to the government’s ban on large gatherings etc.

 

Differences between Force Majeure & Frustration

If a contract is ‘frustrated’, it brings the contract to an end, which may not be beneficial in the long term. A postponement, for example, may be the preferred option.

The benefit of relying on force majeure is that it may merely delay the obligations until the pandemic is over. However, this depends on the wording of the clause.

 

Legal Advice on Contractual Obligations

There is a high threshold in Ireland for relying on both force majeure and frustration as reliefs to avoid a claim for breach of contract. The courts will be reluctant to allow non-performance of a contract. That is, unless it’s impossible, not merely inconvenient to perform the contractual obligations.

It is best to seek legal advice at an early stage to ensure that you comply with any notice provisions in the contract.

If you require assistance please contact Daragh.O’Donovan@orpenfranks.ie or Laura.Bolger@orpenfranks.ie in our commercial litigation department.