COVID-19 has resulted in breaches of commercial contracts across the globe. Clearly, no party is at fault for a global pandemic but that does not mean the parties might still be liable to perform an affected contract.
This note, together with our flowchart, takes a practical look at some of the applicable legal principles to help you determine where you stand in relation to your contractual obligations.
Please bear in mind that every case will turn on its own facts and this note is general guidance rather than specific legal advice.
Step 1: Is there a force Majeure Clause?
If COVID-19 results in a breach a contractual obligation, a force majeure clause might operate to excuse that breach.
The Laws of Trinidad and Tobago contain no rule of force majeure. Nevertheless, it is a common contractual clause. Accordingly, the applicability and effect of ‘force majeure’ are entirely dependent on what the contract says. The clause need not be labelled ‘force majeure’; the key question is whether the contract makes provision for some sort of interrupting event beyond the parties’ control.
The clause should define a force majeure event. Sometimes a force majeure event will include pandemics. However, it is more likely that the clause will refer to an ‘Act of God’, ‘an unforeseen event’, or ‘an event beyond the reasonable control of the parties’. COVID-19 is likely to fall within all of these definitions.
Most standard clauses require the force majeure event to cause the failure or delay of performance. If COVID-19 does not prevent the parties from carrying out their obligations, or is a mere inconvenience, it is unlikely that a party will be able to benefit from a force majeure clause.
If you wish to rely on a force majeure clause, it is very important that you comply with any stipulated requirements. Often, a force majeure clause will require a party to provide the other party with written notice of a force majeure event. If you do not do so, you may later be unable to rely on the clause.
What is the effect of force majeure?
If COVID-19 is a triggering force majeure event under the contact, the effect is entirely dependent on what the clause says. Typically a clause will suspend parties’ obligations or provide that no party shall be liable while performance is prevented, delayed or hindered by the force majeure event. In some cases, the clause will give the parties the option to terminate the contract altogether.
Force Majeure: Key Features
- A force majeure must be an express term of the contract.
- The applicability and effect of a force majeure event are entirely dependent on the wording of the clause.
- You must comply with any stipulations contained in the contract e.g. to provide written notice of a force majeure event.
- Typically, neither party can be at fault for failing to perform a contractual obligations.
Step 2: is the contract frustrated?
If COVID-19 makes performance of the contract impossible, the contract could be discharged by the doctrine of frustration.
If your contract does not contain a force majeure clause, another avenue of legal redress could be the doctrine of frustration. However, frustration operates in a narrow context and, unlike with a force majeure clause, the effect of frustration is to end the contract.
The current legal test for whether a contract is frustrated is as follows:
“Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”
In other words, what you are now required to do, is not the same as what you promised.
Frustration is typically a supervening event, such as COVID-19. Common examples of frustrating events include the cancellation of an event or supervening illegality i.e. changes in the law affecting the contract (discussed below). For frustration to apply, the parties cannot have contemplated the frustrating event. While the timing of the contract may be relevant in this regard, it is more likely that the parties will be deemed to have contemplated COVID-19 by inclusion of a force majeure clause.
Frustration: Key Features
- If COVID-19 was contemplated, for example in a force majeure clause, frustration is unlikely to be applicable.
- Neither party can be at fault for the failure to perform the contract.
- The contract is impossible to perform or radically different.
- Length of frustration is likely to be a relevant consideration. In a contract to provide services for two-years, if COVID-19 only impacts performance for six weeks, the contract is unlikely to be frustrated.
- If the contract is frustrated, the contract is terminated.
Example scenario
The parties must look closely at how the actual obligations are affected. For example, a contract for a Soca artist to perform at a fete that has been cancelled due to COVID-19 is likely to be frustrated. It is impossible for the Soca artist to perform at a fete that is not taking place.
However, consider the contract for a maxi driver to take persons to the venue of the cancelled fete. Subject to any restrictions imposed by law, the driver is still capable of performing his contract obligation to take those persons to the venue at the date and time agreed. The persons are still capable of performing their obligations, namely to pay the driver. Performance has not been frustrated, rather the purpose of the contract has been frustrated.
While far from settled, the law has drawn a distinction between obligations that are frustrated and the purpose of those obligations being frustrated.
Supervening illegality
Supervening illegality is a form of frustration. A contract is discharged if its performance becomes illegal.
The rationale is that a person cannot profit from an illegal act. The Public Health [2019] Novel Coronavirus (2019-nCoV) (No.11) Regulations 2020 place various restrictions on people and businesses in Trinidad. For example, during the relevant periods, it became illegal to conduct the business of a bar or provide seated dining at a restaurant. Therefore, a contract for a bar or restaurant to host an event would be frustrated, as it would be illegal for the bar or restaurant to fulfil their obligations.
Illegality must clearly prohibit performance of the contract. Whether the contract is frustrated will be a question of interpretation and timing of the Coronavirus Regulations. This is unlikely to be a straightforward exercise; they have been amended frequently and have sparked much debate. To further complicate matters there has been a discord between the actions of the police and what the law actually prohibits.
Things are less clear cut when the contract is for an illegal purpose. For example, if you supply beer to a bar owner who you know is intending to operate a bar illegally, is the contract frustrated? Can he withhold payment on the grounds of illegality? The law is not clear on the answer. It is likely to depend on whether the court thinks that the supplier was ‘participating’ in the illegality or merely had knowledge of it. The court will also consider the underlying purpose of the illegality and how that purpose will be furthered by denying the enforcement of contractual rights.
Act carefully: make sure you cannot be blamed
Finally, a common feature of force majeure and frustration, it that they are unlikely to apply if you are in some way at fault for your breach of contract. Even if COVID-19 has in some way prevented, delayed or hindered performance, you must take reasonable steps to avoid or mitigate the consequences.
Think carefully about the choices you make as a business. If a chance to perform the contractual obligation has been closed off by any act or omission, you may find yourself liable under the contract and unable to rely on any of these principles.
Conclusion: action points
- Understand what the contract says.
- Keep abreast of legal developments and government guidance.
- Do not assume there will be no liability.
- Understand your legal position before breaching a contract. The flowchart below may assist.
- Communicate with the other party and try to agree a way forward. However, always do so with an understanding of your legal and contractual rights.
- If in doubt, seek legal advice.
