What happens when you cannot fulfil the terms of a contract, because of COVID-19?
Normally, if you are in breach of a contract, you’re open to be sued by the other party. The first thing to do is to inform the other party as soon as possible and seek to mitigate matters with them. It’s always better to talk.
However, if this doesn’t work, there are a few options that you can explore to help you defend any claims that might arise.
Does your contract contain a force majeure clause?
A Force majeure clause is a provision in a contract that excuses a party’s inability to perform its obligations if an unforeseeable event prevents them from doing so.
The Chinese government has made clear that it considers COVID-19 to be a force majeure event. So, if the Irish government or a government in a country that directly effects the contract, states that COVID-19 is a force majeure event, that will go a long way to help a business seeking to rely on such a clause.
If an Irish court analyses a force majeure clause to determine if it applies to the non-performance of a contract, there are some key factors that they will consider:
- What language is specifically used in the force majeure clause?
- Evidence that the force majeure event was unforeseeable.
- Proof of a causal link between the force majeure event and the non-performance of the contracted obligations.
- Evidence from the party attempting to invoke the clause, that the effects of the force majeure event were so beyond their control that their contract obligations could not be performed.
The two key factors are the precise language in the force majeure clause and the unforeseeable nature of the events defined in the clause.
Force majeure clauses will often include a long list of possible events that are considered unforeseeable by the contracting parties. A typical clause would include, “act of God” (these are usually interpreted to be fires, earthquakes and floods, etc.), if the clause specifically includes epidemics or pandemics, this will go a long way to convincing the court to allow the party to rely on the force majeure clause. It should be noted that an “act of God” alone may be too broad to excuse a party from relying on a force majeure clause to excuse performance of the contract
Doctrine of frustration
This occurs where circumstances beyond the control of the parties to the contract mean that the contract can no longer be performed. For a frustration defence to succeed, it would need to be established that an event has occurred, that is serious enough to render performance impossible. Or, that the obligation is fundamentally or radically different from what was agreed to when the contract was entered into, not merely much more expensive or delayed. While COVID-19 may escalate to this level, in the past this doctrine has been very narrowly construed by the courts and relying on a force majeure clause is (or at least it was in the past) considered a better option.
Material Adverse Condition (MAC) clause
These are clauses usually used in financial documents and used in mergers/acquisitions and are similar to a force majeure clause.
You need to urgently review all your contracts and If you are unable to perform a contract as a direct result of COVID-19 or if the government declares COVID-19 a force majeure event, then you may be able to rely on a force majeure clause in a contract. If your contract does not have a force majeure clause, the hill gets a bit steeper to climb.
Click here for advice for employers on how to deal with Covid-19 in the workplace.