The rapid and indiscriminate spread of COVID-19 has taken the world by storm, leading to severe restrictions on trade and movement, cancellations of events, shortages of supplies and raw materials and the unavailability ofseveral services. With confirmed cases recently announced in Jamaica and the wider Caribbean, it is inevitable that commercial relationships and agreements will be adversely affected, particularly those based on trade, travel or events. With the situation progressively deteriorating with each passing day, COVID-19 will no doubt have businesses scanning through their contracts in order to ascertain what their position may be, given the change of circumstances brought about by the illness.
Generally, parties to a contract are bound to perform the obligations they have agreed to, notwithstanding any difficulties which may arise after the contract is signed. However, where there is an event as serious and widespread as COVID-19, there are two primarylegal methods by which beleaguered businesses may be able to relieve themselves of their contractual obligations.
Force Majeure
This is a Latin term which translates to “superior force”. It is common for commercial contracts to contain a force majeure clause, which typically sets out what happens in the event that one or both parties are prevented from performing their obligations as a result of some event which is beyond their reasonable control. The clause should, at a minimum, outline what constitutes a force majeure event, set out any notification requirements,state whether the parties will be allowed additional time, indicate whether there will be a right to terminate, and set out the consequences of termination.
Generally, a force majeure clause will list examples of events that will enable a party to trigger the clause. These usually include acts of God, war, riots, industrial action, and some clauses may expressly extend to epidemics and pandemics. In any event, the clause will usually include this catch-all statement: “… and any other cause beyond the reasonable control of a party”, and for many commercial arrangements the COVID-19 outbreak would fall squarely within that description.
If the clause can be invoked, the party relying on it may be able to benefit from additional time to fulfil its obligations, or to terminate the agreement after the event has persisted for a specific time period. However, businesses should carefully consider whether the clause can in fact be relied on, as this requires an assessment of each individual contract. If the matter is litigated, it will be for the court to determine whether the clause is applicable to a given state of affairs.Where performance is only made more difficult or expensive by COVID-19, and not necessarily impossible, it might be the case that the clause cannot be invoked. It is therefore important to consider the terms used, how exactly COVID-19 has affected performance and the actual extent to which the ability to perform the contract is prevented by COVID-19. Rushing to invoke the clause in circumstances where it really cannot be may ultimately result in a trip to the courts for breach of contract.
Frustration
While it is expected that any well-drafted commercial contract will contain force majeure provisions, where there is no force majeure clause the common law provides another potential avenue which may offer relief to a struggling party.A contract can be discharged on the basis of ‘frustration’ where something occurs after the making of the contract whichrenders it physically or commercially impossible to fulfil, or which transforms the obligation to perform into something radically different than what was originally envisaged.
It is typically much harder to establish frustration than it is to invoke a force majeure clause, and it has only been successfully proven in limited cases. However, contracts have been deemed to be frustrated in circumstances where there is an order or a change in the law which prevents the contract from being performed, where the subject matter of the contract is destroyed, where a party has died or is incapacitated and where there is a cancellation of an expected event.
Where frustration is established, the contract is automatically and immediately ended, and the parties are excused from their future obligations. In addition to this, the court may make certain determinations pursuant to theLaw Reform (Frustrated Contracts) Actthat will dictate the basic rights and obligations of the parties post-termination. By virtue of this Act:
- Money paid before the frustrating event can be recovered, and money due before the event remaining unpaid ceases to be payable. However, if the court sees fit, a party to whom money was paid or due,and who incurred expenses in furtherance of the contract, may be permitted to retain or recover some or all of these sums up to the amount of the expenses incurred.
- A party who gained a valuable benefit before the discharge of the contract may be required to pay a “just” sum for it, having regard to all the circumstances of the case.
Parties seeking to rely on force majeure clauses or to establish frustration may face an uphill battle. Accordingly, it is critical that businesses experiencing difficulties in fulfilling their contractual obligations approach the developing situation from an informed position by seeking professional advice and representation before determining the way forward.