Guidance For Businesses on Avoiding Contractual Liability.
The imposition of legal and regulatory steps by the government to combat Covid-19 poses a significant threat to many businesses. Many supply lines have been interrupted, sales are dropping and cash-flow is disappearing. Many businesses could fail. Businesses now need to consider whether they can avoid contractual liability and must review contracts to see if any clauses offer protection.
How to Limit Contractual Liability
In these unprecedented times parties still have an on-going duty to comply with their contractual obligations. Failure to do so, may lead to legal action. There are however two possible ways to limit contractual liability: the imposition of any force majeure clause; and the concept of frustration.
Force Majeure may provide protection when the performance of a contract is not possible. Critically, the interrupting event must come from events beyond the contracting parties control. Covid-19 is the current threat but any event such as a terrorist attack, the collapse of a building, a fire or an explosion could equally apply. Force majeure clauses need careful consideration. First there must be a force majeure clause, failing which there can be no reliance. Whether or not a force majeure clause can be relied upon will depend upon a number of factors including the way it has been drafted.
Points to Consider:
- If the contract does not include a force majeure clause it cannot be relied upon.
- Look at the wording of the clause. This is critical. Are the events unfolding covered by the force majeure clause?
- Does the clause refer to pandemic, epidemic, disease, government action or a catch all provision such as “any other cause beyond the party’s control”?
- Does the clause specifically exclude any act; if so force majeure will not apply to those events.
- Has the current Pandemic together with any Government imposed lock-down prevented, affected or delayed performance of the contract?
- Are the unfolding events the only reason for non-performance?
- If non-performance is in part due to actions of the parties, force majeure will not apply.
- Is there another way of performing the contract, by spending more money or taking more time for example? If so force majeure will not apply.
- If the contract stipulates that certain procedures or notices must be followed, failure to do so may invalidate reliance upon the clause.
- Look for any continuing obligations if the clause is invoked.
- Any party relying on the clause must normally take reasonable efforts to mitigate any losses.
- What is the party relying on the clause looking to achieve: cancellation, suspension or variation?
- If the contracting parties want good business relationships to continue, it is essential to communicate at a very early stage. Do not leave matters until the last minute.
Force Majeure clauses are not straight forward. Legal advice should always be sought before invoking such a clause or after receiving notice from a contracting party.
Absent a force majeure clause, one might consider the common law doctrine of frustration. Where a party is unable to physically or commercially perform its contractual obligation they may still be able to avoid liability depending on the circumstances.
Points to Consider:
- Does the event leading to frustration affect the foundation of the agreement envisaged by the parties?
- Did the party looking to rely on frustration cause the frustrating event in any way?
- Is it physically or commercially impossible to perform the contractual obligation?
- Remember that the Counter-party is still able to recover under the contract up until the point it was frustrated.
Typically, the courts will always try to deal with disputes by relying on other legal points and one should always seek legal advice at an early stage.
Kumari Hart Solicitors have the experience and expertise to deal with all contractual issues from advising on terms of contract or dealing with disputes. Click here for more information.