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Education briefing - Coronavirus - contract termination and force majeure

  • United Kingdom
  • Education - Briefings
  • Education - Coronavirus

01-04-2020

Introduction

Last Monday’s announcement from the Government placing the country in lockdown will be felt heavily by institutions who are trying to ensure continuity of provision to students and maintain quality and standards of teaching. In our previous briefings, we have explored some of the issues institutions will face as a result of the pandemic, including the options available in terms of managing and, if possible, renegotiating any commercial contracts affected. See in particular our briefing Guidance for education institutions on contracts with third party suppliers during closure period.

However, for those contracts where such options are not possible, here, we look at the relevant factors for institutions in considering termination in the current circumstances, whether as the recipient or provider of services.

What is force majeure?

Force majeure clauses permit parties to change their obligations or liabilities under a contract when an extraordinary event or an event out of their reasonable control affects either or both party’s ability to fully perform their contractual obligations.

They may provide for a party to be relieved from performance under the contract, either in full or in part, excuse any delay in performance or allow extensions for the timeframe specified under the contract for performance.

Is Covid-19 a force majeure event?

It will depend on the drafting of the clause. Generally speaking, a force majeure clause will either:

(a) set out specific events covered e.g. war, earthquakes, hurricanes, acts of government, epidemics or disease; or

(b) use broader wording such as “act of God” or “circumstances beyond the parties’ reasonable control”, or

(c) a combination of the two i.e. set out some examples of specific events but also refer to any circumstances beyond the parties’ reasonable control or an act of God.

If the clause refers to an epidemic or disease then Covid-19 will likely be covered but there will still need to be a causal link between Covid-19 and the inability to fulfil contractual obligations. Otherwise, it may fall within act of government. Until last week’s announcement, it was unclear whether the current guidance from the government constituted an “act of government” since no formal order or exercise of legal powers had been used. However, with the Coronavirus Act 2020 being given Royal Assent on 25 March 2020, it should now be.

If neither of these events is specified and there is wider provision it may be possible to argue that the specific events were intended as examples only, and not as a definitive list, but this will depend on the drafting of the clause.

Even if it is force majeure can I terminate?

If it can be established that Covid-19 constitutes a force majeure event under the contract, this does not necessarily provide an automatic right to terminate. It will depend on the specific wording used and the current circumstances, as well as the circumstances in which the contract was entered into. For example, whether the contract was entered into since the pandemic was declared or there were specific timeframes within which the contract must be performed.

Even if termination is permitted under the clause, before doing so, a party will need to be able to demonstrate that:

• it was willing and able to perform the contract

• the non-performance was beyond its control

• there were no reasonable steps that could have been taken to avoid or mitigate the event

If performance has been made more difficult or more costly as a result of Covid-19, but is still possible, this is unlikely to be sufficient to allow termination of the contract, even with a force majeure clause.

If performance has been prevented as a result of the coronavirus or the corresponding restrictions, then whilst the supplier may be able to terminate, leaving the institution to take the risk of those obligations not being performed, this may not be in the best interests of either party. If timing is not a fundamental component of the contract then, the parties may, subject to its provisions, be able to agree to delay or suspend performance until the pandemic is over, if alternatives are not available.

Care should be taken in exercising any right to terminate pursuant to a force majeure clause however. If the terminating party makes the wrong call and it is ultimately decided that the circumstances do not give rise to a force majeure event, they could face a claim for breach of contract based upon wrongful termination.

What if there is no force majeure clause in the contract?

Force majeure clauses cannot be implied by way of statute or common law and so must be expressly included in contract in order to take effect. If a contract is silent on force majeure therefore, then a party is not able to rely upon it. This is different from other jurisdictions outside the UK where the Courts may declare particular events a force majeure event.

If there is no force majeure clause in the contract then a party looking to terminate will need to look elsewhere in order to vary or terminate its obligations under the contract.

(a) Frustration

Frustration is a general legal principle which, in the right circumstances, can arise irrespective of the express provisions of the contract. This is the concept whereby a contract can be terminated (and all contractual obligations) if it has become impossible, whether physically or commercially, to perform as a result of an unforeseen event. As a general principle the bar for establishing frustration is very high and the circumstances in which courts have been willing to concluded that a contract has been frustrated very limited; usually where the sole purpose of the contract has become illegal or as a result of wartime legislation. In the current unprecedented circumstances, and with a lockdown now being imposed, the case for a contract having been frustrated may be stronger. Much will depend however upon the terms and purpose of that contract and whether it can be said that the restrictions imposed as a result of coronavirus really do fundamentally undermine the ability to perform over the period of the contract.

(b) Material hardship

Alternatively, there may be a material hardship or material change in circumstances clause which allows a party to protect itself if the contract becomes too onerous or expensive to perform or there has been a material change in circumstances since the contract was entered into.

(c) Insurance

If it’s not possible to terminate the contract but performance inevitably becomes more difficult or costly, the institution will want to explore how those losses might be mitigated in other ways. It will be important in that respect to check all relevant insurance policies very quickly, because losses or liabilities arising out of Covid-19 might be covered by insurance. Although it is likely that standard business interruption insurance will not cover most consequences of the Covid-19 outbreak, the government has indicated that additional measures will be put into place to support businesses affected by Covid-19.

5 key points for contract termination

• Carefully review the contract to ascertain whether it includes a force majeure clause. Consider the current circumstances, what is preventing performance and whether this falls within the provisions of the clause. Consider the issues faced and whether any alternatives are available.

• Try to mitigate any losses, wherever possible.

• Consider any applicable insurance policies

• If there is no force majeure clause, consider alternatives such as material hardship or frustration.

• If terminating, ensure any procedural requirements included in the contract such as notice provisions, timescales etc are complied with. There are no such requirements with frustration.

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