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Can I rip up a contract because of the Covid-19 crisis?

So you want to get out of a contract because of the current Covid-19 crisis? The basic legal principle to follow is that you are required to perform your side of the contract regardless of an unexpected change in circumstances such as Covid-19. If you fail to do so then you risk being liable for breach of contract. In other words, unusual circumstances do not automatically render a contract invalid – just because something expected changes your commercial position it does not release you from your responsibilities….. It doesn’t matter that the worldwide shutdown might mean that you will now make a loss on the contract. There is no right to break a contract simply because events make it commercially nonviable.

However, there are two potential escape routes that provide an exception to this basic contractual principle: (1) the force majeure clause; and (2) the law of ‘frustration’.

Force Majeure

Some contracts are drafted to contain a ‘Force Majeure’ clause. A Force Majeure clause (French for “superior force”) is a contract clause that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance impossible. All force majeure clauses are drafted differently, there is not a ‘standard wording’ – therefore you should look at the wording of your clause to determine whether Covid-19 is covered as a force majeure event.

An example of a Force Majeure clause wording:

Neither of the parties to this agreement shall be liable for any failure or delay in performance of its obligations under this agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; acts of terrorism; sabotage; strikes; epidemics; riots; power failures; computer failure, loss or malfunction of utilities, transportation, labour disputes; acts of civil or military disobedience; governmental actions.

If the Covid-19 epidemic is not specifically covered as a force majeure event (and let’s be honest, it probably isn’t given that no one had heard of Covid-19 before January 2020), then you will need to check if Coronavirus is the type of event that would fall under general force majeure descriptions.

For example, the clause above includes mention of “epidemics” as a force majeure event. It also includes “government actions” which could apply where a government lockdown has made performance of the contract impossible.

The burden is on the party that is relying on force majeure to establish that the force majeure event has prevented it from performance of the contract. For example, some force majeure clauses state that performance must be rendered “impossible”, not just “difficult” or “non-commercial”. In that case, the party seeking to rip up the contract must show that its contract obligations could not be performed, not just that it would be a lot more expensive or difficult  tfor them to perform.

Frustration

If you do not have a force majeure clause to rely on in your contract then you might have recourse to the common law doctrine of frustration. This is not a contract clause that would appear in your agreement. It is a general legal principle that allows a party to be discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract or would render performance radically different.

Although the threshold is set very high and it is difficult to persuade a Court that your circumstances are sufficiently serious to ‘frustrate’ the contract, there could be some situations arising from Covid-19 that reach this threshold, for example, where the contract requires performance in a country that is subject to a state-imposed lockdown. For example, where the Government has ordered a shop to shut or prevented travel that is a fundamental part of the contract.

Once again the threshold to reach is that the contract is impossible to perform, rather than just very difficult or commercially disadvantageous.

 

davidhughes

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