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Commercial Contract

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Commercial Contract THE IMPACT OF COVID-19: FRUSTRATION, FORCE MAJEURE, HARDSHIP AND DEALING WITH UNCERTAINTY Professor Ewan McKendrick University of Oxford SETTING THE SCENE • Contracts entered into in 2019 • Contracts entered into in January or February 2020 • Contracts entered into in March 2020 or thereafter • The response of the Chinese authorities – issuing force majeure notices • The Cabinet Office response – encouraging co- operation FRUSTRATION: INTRODUCTION • A doctrine which operates within narrow limits • Contract not frustrated if provision made for event in the contract itself • Subsequent impossibility • Subsequent illegality • Performance radically different from that which was in the contemplation of the parties at the time of entry into the contract • Not an escape route from a bad bargain • Drastic consequences of its invocation • Doctrine only open to review by the Supreme Court SUBSEQUENT ILLEGALITY • Focus here is on what the law requires, not on government guidance which does not have the force of law • Illegality as a matter of English law, not foreign law • Which has had the effect of removing all or substantially all of the benefit that one party receives from the performance of the contract • Fact that illegality is foreseeable is irrelevant • Cannot make express provision for subsequent illegality • Heavy public policy influence • Contrast discretionary approach in Patel v Mirza IMPOSSIBILITY • Impossibility, not impracticality • Not sufficient that performance has become prohibitively expensive • A partial failure of supplies will not suffice – failure must be total so that performance is impossible: Super Servant II • Impossibility must not be attributable to fault of either party • Must not have been foreseeable DELAY • Delay must be abnormal • Outside what the parties could have reasonably contemplated at the time of entry into the contract • Prospective not retrospective • Compare length of delay to duration of contract EFFECTS OF FRUSTRATION • Automatic discharge of the contract • Discharge prospective, not retrospective • Law Reform (Frustrated Contracts) Act 1943 • Reverse unjust enrichments but not loss apportionment • Sums paid before discharge recoverable, sums due cease to be payable - allowance for expenses • Non monetary benefits – if there is a valuable benefit may be required to pay a just sum FORCE MAJEURE CLAUSES INTRODUCTION • Force majeure not a legal doctrine in English law – compare French law • A contract term • Important to examine the content of the term – be careful with ‘boilerplate’ clauses • The function of the clause (i) shield from liability in damages, (ii) suspension of the contract, (iii) termination of the contract INTERPRETATION OF FORCE MAJEURE CLAUSES • Approach to construction – need for clear words • Contra proferentem rule – unlikely to apply • Burden of proof • Must the event be unforseeable? • The specific events – pandemic or epidemic – government action - embargo • What is the value of the list? • Examine the nature of the events – is there a link between them? THE ‘WRAP UP’ PROVISION • The general wrap-up provision (‘similar events which reasonably may impede, prevent or delay the performance of this contract’) • Does the ejusdem generis rule apply? • If it does, can it be excluded? • Why insert a ‘wrap up’ provision of this type? BEYOND THE (REASONABLE) CONTROL OF THE PARTIES • Must the event be beyond the control of the parties? • As a matter of implication • As a result of an express term of the contract • Is there a difference between ‘control’ and ‘reasonable control’? CHANGE IN ECONOMIC CIRCUMSTANCES • Can a party for whom performance has become significantly more expensive rely on a force majeure clause? • Depends on the wording • ‘If either party is by reason of force majeure rendered unable wholly or in part to carry out its obligations under this agreement then… • ‘prevent’ ‘hinder’ or ‘impede’ performance THE CAUSAL LINK • Generally the force majeure event must be the cause of the non-performance • But what of the case where the party seeking to rely on the clause would not have been able to perform in any event? • May be irrelevant where the party is relying on the clause solely to bring about its prospective discharge • But may be very relevant where reliance is placed on the clause in order to shield a party from liability in damages NOTIFICATION OBLIGATIONS • Is there a contractual requirement to give notice of the occurrence of a force majeure event? • Is the giving of notice a condition precedent to reliance upon the clause? • Remedies for non-compliance? • When must notice be given? • What form must the notice take? THE EFFECT OF THE CLAUSE • Shield the party relying on the clause from liability in damages • Enable a party to suspend performance of the contract for the duration of the force majeure event • Entitle the party relying on the clause to terminate the contract • Bring about the automatic termination of the contract • Depends on the drafting of the contract HARDSHIP CLAUSES • What amounts to ‘hardship’ • Is the clause enforceable or is it an agreement to agree? • Likely to be used where wish to be able to adapt the contract because of changed circumstances • Can the parties be required to re-negotiate the terms of their contract to restore the equilibrium of the contract? • If the parties refuse to do so or the renegotiation is unsuccessful, what remedies are available? • Will the court adapt the contract or is the only remedy one in damages? • Is there a difference between litigation and arbitration? MATERIAL ADVERSE CHANGE CLAUSES • Loan agreements and financial contracts • What is a ‘material’ adverse change? • What are the consequences of reliance upon the clause? • Why rely on such a clause? • When will it be used in preference to a force majeure clause? DEALING WITH UNCERTAINTY • What provision can you make for the impact of COVID-19 on you or your clients’ contractual obligations? • Is the aim to shield from liability in damages? • Is the aim to adapt the contract to changed circumstances • Is termination the preferred option? If so, can the termination event be identified with sufficient precision? DEALING WITH UNCERTAINTY • The problem of long term contracts • Move towards short term contracts? • Preserving flexibility • But avoid drafting agreements to agree which are unenforceable.
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