Please note: The information contained in this article is correct as of 06/01/2021. Due to the developing nature of the coronavirus situation, guidance is subject to change. While we are doing our best to ensure our blogs are up to date, it is always advisable to speak with a solicitor for specific advice.
Businesses will be concerned whether their contracts are enforceable against third parties and whether third parties can enforce their contracts against them.
Three aspects to consider:
General rights to terminate on notice;
If there is a general right to terminate on notice, you need to check:
the right to terminate applies in the circumstances
the notice period
any penalties apply and if they are enforceable
the clause concerning the means by which notice needs to be given and any deemed dates of service
If there is a force majeure clause:
Check the events that count as ‘force majeure’
The burden of proof will be on the defaulter to prove that the event falls within the scope of the clause and that the non-performance is due to the event
Check the period for which the clause relieves the defaulter from performing its obligations and then what happens e.g. rights to terminate if continuing after a certain period
Have reasonable steps been taken to prevent or to mitigate the effect of the event?
As a last resort consider whether the contract has been ‘frustrated’
Is it physically or commercial impossible to fulfil the contract; or is the obligation to perform now a radically different obligation from that undertaken at the moment of entry into the contract?
Generally speaking a frustrating event:
Must have occurred after the contract is formed;
Is so fundamental that it strikes at the root of the contract;
Was beyond what was contemplated by the parties when they entered the contract;
Must not be due to the fault of either party
Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties when they made the contract
A business may be unhappy that a defaulting party is seeking to excuse itself from its obligations. There are different outcomes depending on which (if any) of the above can be relied upon.
Termination on Notice
Termination does not render the contract as if it had never been made. Instead, from the time of termination, both parties are released from any further duty to perform their primary contractual duties. Some secondary obligations will survive.
Rights that have accrued up to the time of termination are usually still enforceable
A party in breach must pay damages unless the contract specifically provides otherwise
Force majeure suspends a party’s obligations for the period during which an event occurs. It does not dispense with the obligations. When the event comes to an end the contract is re-activated.
It is important for the affected party to take all possible steps to avoid the event or its impact (to mitigate).
If the clause allows termination after a period of time it may specify that termination is without liability, except in respect of prior breaches.
A frustrated contract is automatically discharged and the parties released from their future obligations.
Neither party may claim damages for the other party’s non-performance of obligations falling after the frustrating event.
Money paid before the frustration event can be recovered.
Money due before the frustrating event, but not in fact paid, ceases to be payable.
A party who has incurred expenses is permitted, if the court thinks fit, to retain an amount up to the value the expenses out of any money it has been paid before the frustrating event.
Where money was due and payable at the time of frustration, a party who has incurred expenses is entitled to recover its expenses incurred.