02 Jul Contracts are at the heart of business

Contracts are a vital part of doing business, they prescribe expectations and referee relationships between commercial parties.

The COVID-19 pandemic is a significant business challenge and during these unprecedented times it is important to consider the contractual issues facing many businesses and individuals.

Businesses under financial strain may face difficultieswhen trying to execute their contracts. If they determine that continued performance is not possible, they may try to look for ways to suspend or terminate their obligations.

In order to mitigate losses at an early stage, Croft Solicitors recommend that companies review all commercial contracts to assess how the contracting party’s performance may be affected by COVID-19.

The conventional contractual position is that if performance of a contract becomes difficult or impossible, the party in breach will be liable to pay the innocent party damages.

There are two exceptions to this rule:

1. Force Majeure

2. Frustration Commercial contracts will often have a force majeure clause to cover what happens under extreme situations which result in a party being unable to perform its contractual obligations. If one of the events listed in a force majeure clause happens, the clause will normally state what the parties should do next, for example:

• Obligation to mitigate: the non-performing party may be required to take all practicable steps to avoid the event and limit the impact of its consequences;
• Non-liability: once triggered, neither party may be liable to the other for any losses as a result of the force majeure event;
• Right to terminate: some force majeure clauses allow either or both parties the opportunity to serve notice and terminate the contract.

Parties duties and remedies available under a force majeure clause will depend on the drafting of the clause. It is therefore critical that contractual terms are analysed carefully when seeking to rely on this clause.

The Doctrine of Frustration

If a force majeure clause is absent from a contract, the common law doctrine of frustration may respond to discharge the contract.

A contract can be ‘frustrated’ when an event happens, 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 entering into the contract. When a contract is frustrated, it is automatically discharged. The result of this is that the parties are excused from their obligations. The remedies available are often limited and inadequate.

At Croft Solicitors we remain committed to supporting businesses during this critical time. Our focus is on giving proactive advice and resolving disputes.

For further information, or to instruct Croft Solicitors, please contact Laura Nelson at Croft Solicitors on + 44 (0) 1242 285 855 or laura.nelson@croftsolicitors.com.