When Covid makes it impossible to fulfil contracts
Congratulations if your charity’s business continuity planning or risk register had the foresight to include the circumstances of a global pandemic. Many charities have defied tough odds to survive and even thrive and the sector has seen great innovation, creativity and resilience.
Along the way, however, much valuable time and head-scratching has been sunk in the quagmire of contractual complexities arising from the inability to fulfil contractual obligations as envisaged. Not to mention the inability of other contractual parties, or those above or below your charity in the contractual chain, to honour theirs.
Every charity engages in some contractual activity. Perhaps your charity hosts events: maybe you have a concert hall, or a theatre, or a historic building. Perhaps your charity provides social care services under contract to your local authority. Maybe you run educational classes and engage the services of different providers and venues in order to do so.
Maybe your charity runs its own classes and charges fees in advance to people to attend them. Perhaps your funding stream is contractually dependent on your charity’s achievement of key performance indicators. Whatever the nature of your charity’s activities, you likely buy in supplies of goods and services in order to undertake those activities and operate your charity.
But what if you can’t provide your services? What if your services are no longer needed? What if you can’t obtain what you need to provide your services? For how long? Who has to pay for what and when?
Suddenly a global pandemic inhibits your ability to fulfil the contracts into which you have entered in good faith. You cannot meet your obligations because of Government-imposed restrictions to tackle Coronavirus and/or because third parties on whom you depend in order to perform your contracts cannot perform their obligations.
Contractual small print
No one finds reading the contractual small print a life-enhancing experience. But it is essential, and time spent doing so pays dividends when something goes awry or the unexpected happens. Know the contents of your contracts, manage key dates and performance obligations, and review key terms with particular care. Even if you are fed up with force majeure and frustrated by frustration, these concepts require your close attention.
Breaching your contracts is unpalatable, as it may result in significant financial and reputational consequences, and pose a threat to your continued existence now or beyond Covid.
You may not wish actually to terminate a contract and the scope to do so may be insufficient to extricate you from immediate Covid-caused difficulties. Covid is a supervening event and therefore you need to look elsewhere in contracts, and perhaps seek legal advice, to find a safe exit from unmeetable commitments and avoid breaching contracts.
Force majeure
The purpose of a force majeure clause is to help a party rendered unable to perform its contractual obligations because an act, event or circumstances beyond its reasonable control prevents it from doing so. Covid cannot be automatically assumed to constitute a force majeure event. It depends on the wording and interpretation of each contract, as well as the facts known to the parties when they made the contract. Check contracts to establish:
Is there a force majeure clause? It may not be labelled “force majeure”, but the relevant clause, if any, will anticipate a supervening event, beyond the parties’ control, which could impact on performance and, where such an event occurs, relieves one or both parties from performing their contractual obligations.
Does the clause include Covid as a force majeure event? The clause may provide a non-exhaustive list of examples which may cover Covid. Or it may include a list of all the force majeure events envisaged by the contract and one such event could be a pandemic. Or it may include a wide definition such as “any event beyond a party’s reasonable control” – that might cover Covid.
Foreseeable events
Does the clause exclude foreseeable events? If it does, when was the contract made and what was known about Covid then. Even if the contract post-dates the pandemic becoming widely known, the circumstances at the time it was made may be such that the parties could not predict if or how Covid would affect it. Force majeure events need not necessarily be those which are unforeseeable and the interpretation of the clause may be argued, depending on the context of what the parties knew or envisaged when the contract was made.
What is the effect of the clause on contractual obligations? For example, it may allow you to suspend or defer performance of your obligations, or even excuse you from performing some or all of them. It may alter the termination provisions, or stipulate new obligations regarding mitigating or notifying the other party about steps taken. It may or may not excuse you from making payments due under the contract - check payment provisions carefully.
Does the clause only bite if performance of the contract is actually legally or physically impossible? Rather than just difficult or financially unappealing?
What if the contract has no force majeure clause? Do not assume that force majeure will apply. Force majeure provisions are unlikely to be implied, even where the parties consider that a force majeure event has occurred and has interfered with, or prevented, contractual performance. The party which fails to perform because of Covid is therefore likely to be in breach of contract, even though the failure may not be their fault.
Frustration and illegality
Frustration may apply if Coronavirus renders performance of the contract legally or physically impossible through no fault of the parties. If frustrated, a contract ends immediately and permanently, with limited scope for redress. In practice, contracts are rarely frustrated. “Impossible” is a high bar and there may be contractual provisions (such as force majeure) of greater assistance to parties.
Consider whether legal requirements such as social distancing or self-isolating would render performance of your contract illegal. Would performance be impossible (not merely hindered) because Covid restrictions prohibited it?
Alternatives to avoiding breach
There may be scope to avoid breach by recourse to other contractual clauses. Check carefully the possibility of:
- Suspending performance.
- Varying the terms.
- Renegotiating the terms.
- Termination.
If the contract contains helpful relevant provisions, invoke them. If not, or where such provisions do not offer the desired scope, liaise with the other party to see what may be agreed. Document the negotiations and agreement reached and keep accurate, dated records. Make no assumptions or unilateral decisions. These may result in an argument over whether you are in breach of contract. And if you manage to agree some new terms, don’t ignore the rest of the contract. Ensure continued compliance with other obligations such as regular progress reports and notice requirements.
Remember the bigger picture and the commercial realities: for example, is your contract part of a supply chain, with a knock-on effect for others if you alter your contract? Are you a theatre with funders’ key performance indicators. multiple touring companies, several dates, audience ticket pre-sales and catering supplies to consider? Are there third party rights arising from your contract? Do you hope to contract with affected parties in the future? What is the wider impact of making any changes to the contract’s payment mechanism? Does a variation affect relevant insurance?
Covid-proof the future
A global pandemic is beyond the control of an individual charity. Each charity can, however, mitigate the impact of crisis circumstances on its continued operation through business continuity planning and risk assessment.
Review your contracts in terms of continuity and risk. Might Covid cause a breach of contract because either you or a contracting party might be unable to fulfil obligations? Are there practical steps to take to avoid a breach? For example, if part of your provision of services under contract to the local authority involves visiting and assessing potential beneficiaries in their homes, could you, and how would you, pivot to conduct the visit and assessment via Zoom, thereby still providing the service and honouring your obligations?
Can you train more personnel to avoid delays which could be caused by staff self-isolating? And definitely develop a communications strategy for contact with contractual parties to keep them informed and hopefully reassured.
What about new contracts? Check that there is a force majeure provision and consider carefully whether it covers pandemics, epidemics and other crises. Review whether the clause covers the extent to which the force majeure event directly impacts your charity and whether there is a need to cover indirect impact that hits elsewhere in the contractual chain, with a knock-on effect on your charity.
Insurance cover
Check insurance policies. Business interruption policies may not cover Covid disruption. Also other policies, such as travel insurance, need careful review. For example, if the reason a trip is cancelled because of disruption or worry, instead of a Government direction not to travel, your policy may not pay out.
Experience shows that the spirit of “we’re all in this together” has so far largely prevailed in these extraordinary times: reason, sense, commercial relationships and realities have helped charities to agree varied or new terms with contracting parties. Claims for breaches of contract have been avoided in many cases. As life tentatively resumes, though, reflect on the contractual issues which have arisen, review and manage existing contracts, consider mitigation strategies and approach future contracts in the knowledge that it could all happen again. Please, surely not.
