Contracts in the Time of Corona
Life in Jamaica has been changing rapidly since the reality of the first confirmed local COVID-19 (“Coronavirus”) case hit last week and the numbers continue to rise. We are all focusing on implementing the recommended measures to stem the spread of the virus, but based on the global statistics it appears that, unfortunately, some amount of spread and impact is inevitable. Numerous businesses worldwide have cancelled or postponed their events or operations such as the NBA, English Premier League, Disneyworld, and locally the Boys’ and Girls’ Champs and Carnival, just to name a few. Some countries are on total lock down with stringent restrictions which have entirely curtailed the operations of many businesses.
Understandably, if you are a business owner, you may be very concerned about any potential impact that Coronavirus may have on your business. Your company likely has various contractual obligations which require the completion of tasks or the provision of goods or services by certain deadlines. If your business, or any particular project, is substantially disrupted or comes to a halt due to the Coronavirus or related circumstances, you may be faced with considering what, if anything, can be done about these contractual obligations to avoid being liable for breach of contract.
Does contract law protect against the Coronavirus?
Generally, contract law makes some provision for unforeseeable, substantial events that affect a contract party’s ability to complete obligations under the contract. In qualifying circumstances, an affected party could attempt to rely on the doctrine of frustration, or in other circumstances, may seek to rely on force majeure. However, it is not automatic that a pandemic such as the Coronavirus would satisfy either of these two doctrines, as it is fact-sensitive and dependent on the terms of the particular contract. It is generally not enough for a contract to merely become harder, more expensive or onerous to perform.
What is frustration of a contract?
A party may be permitted to cease performing a contract when, due to the fault of neither party, it becomes impossible to perform due to unforeseeable circumstances making performance radically different from that which was originally contracted. It applies when the contract does not contain any provision regarding what happens in those circumstances. Common examples of circumstances that may frustrate a contract include the death or incapacity of a party to the contract (if personal considerations are at the foundation of that contract), subsequent changes in the law that cause impossibility of performance, or the destruction of the subject matter of the contract. It is difficult to meet the threshold of frustration and it is therefore not lightly invoked. However, any type of supervening event could potentially frustrate a contract if the contract becomes impossible to perform. If a contract is frustrated, the contract comes to an end immediately and all parties to the contract are discharged from further performance.
What is force majeure?
If frustration does not apply, this is not the end of the matter. A party could still consider invoking force majeure, which is usually a significant unforeseeable event outside of the party’s control that prevents the party from performing the contract. It has some similarity to frustration of contract, except that it is only available if the contract contains a force majeure clause. This clause typically specifies what types of events the parties consider to be force majeure events, but the list could be non-exhaustive or, sometimes, no specific events are mentioned. The contract usually also states the consequences of a force majeure, such as suspending performance until the force majeure ceases or the termination of the contract. The force majeure clause may also contain some reporting and mitigation requirements in order for a party to validly rely on the clause.
Could Coronavirus constitute frustration or force majeure?
The answer is, it depends. Many contracts contain force majeure clauses, but the wording of these clauses vary drastically. Some clauses may only refer to force majeure events generally without defining what these events are, whereas others may specifically list the type of events that constitute force majeure. If your force majeure clause lists specific events and does not include epidemics or pandemics or similar wording, then such a clause may not apply to the Coronavirus directly. However, if your force majeure clause mentions governmental or regulatory requirements, then it could apply indirectly to the Coronavirus only in circumstances where the government or a regulatory body has made a decision that prevents your company from meeting its contractual obligations. For example, the government could designate a quarantine area where your business operates or order the temporary closure of your office, but that type of force majeure clause would not apply if your company voluntarily chose to suspend or halt operations. There may be other types of force majeure clauses or other similar clauses that could apply in those circumstances. Ultimately, the applicability of any force majeure clause will depend on the words used in the clause and the specific facts being considered.
If your contract does not contain a force majeure clause or that clause does not apply to Coronavirus, then you’re not entirely out of luck as you may have some reprieve in frustration. However, as frustration is often more difficult to establish, the impact of Coronavirus on your business operations would likely have to be substantial enough to render your contract impossible to perform. For instance, emergency measures making supply permanently unavailable or skilled labour becoming unavailable to perform a contract due to illness or travel restrictions could constitute frustration in some circumstances. This will largely depend on the nature and terms of the contract, all the specific circumstances and background, the parties’ knowledge and assumption of risk and the possibility of future performance in the new circumstances.
It is clear that the determination of your contractual rights and remedies in the time of Corona is no simple task! There are a multitude of circumstances that could arise in your business due to the Coronavirus and this will likely require careful and speedy consideration to determine where you stand before it is too late. It is especially important that businesses take affirmative steps now, such as locating alternative supply streams or planning for employees to work remotely if the need arises, to attempt to mitigate any potential operational impacts in advance of the continued spread of the Coronavirus.
Stephanie Ewbank is an Associate Attorney-at-Law at Myers, Fletcher & Gordon, and is a member of the firm’s Litigation Department. She may be contacted via email@example.com or www.myersfletcher.com. This article is for general informational purposes only and does not constitute legal advice.