What effect does an event like the current Covid-19 pandemic have on contractural obligations?

Question

Across the world, the current pandemic, and various government responses to it will impact on parties abilities to perform their obligations under a contract.

What are the legal implications of this?

Answer 1

Force Majeure

An event like the current Covid-19 event is what is known as a force majeure event; a Latin term meaning "superior force". It refers to an event that is beyond the control of the parties to a contract such as war, civil disturbance, acts of God and disease.

Common law jurisdictions

In common law jurisdictions (most of the English-speaking world), force majeure is not a legal doctrine but a creature of the particular contract. That is, the extent to which a contract does or doesn't deal with such events is the extent to which such events apply to that particular contract. For example, a construction contract may specify that a contractor is responsible for the care, protection and reinstatement of the works unless damage is caused by war. So, if the damage is caused by war the principal bears the risk but if it's caused by, say, flood, the contractor bears the risk.

If a contract is silent on the matter (in general or in the specific) then the parties obligations remain unchanged by the event and failure to comply is a breach of contract. For example, absent a provision in a contract, in the current pandemic:

• if a supplier is contracted to supply a component that was made in a foreign country and that cannot now be sourced from there; they will be in breach of their contract if they do not supply it. If it can be sourced from a local manufacturer at twice the price of the foreign source then that is the contractor's loss.
• if a company is contracted to provide engineering services and their staff cannot travel (either because they are sick or because of government restrictions) then they will be in breach of their contract and the principal can seek damages.
• if a construction contractor is obliged to finish by a given date and the government closes all construction sites, they will be in breach if they do not complete by that date notwithstanding.

These may seem to be unjust outcomes but, at the end of the day, somebody in the contract has to carry the cost of force majeure events and the development of the common law has left it for the parties to decide who. That is, at the time of negotiating the contract, the law allows that if the parties wanted to consider the risks of say, a pandemic, and spell out whose risk that was, they were free to do so and if they didn't that's their own fault - in the absence of such allocation, the parties must do what the contract says they must do. Common law jurisdictions have traditionally not seen it as the role of government to interfere in the details of private contracts.

Common law has a much narrower doctrine of frustration but this requires that the principal purpose of the contract be impossible to perform, not merely harder or more expensive to perform. Even much harder or much more expensive.

Civil law

In civil law jurisdictions (continental Europe with their ex-colonies and most of Asia), force majeure is a legal doctrine.

It is a defence to liability where the defendant:

1. had nothing to do with the event - this pandemic would fit,
2. is unpredictable - it is not certain that the pandemic was unpredictable. There have been pandemics before and many organisations around the world exist specifically to respond to them. Lest this seems needlessly pedantic, there have been cases decided that because a flood occurred 69 years ago, this flood was predictable; similarly, an avalanche 50 years ago rendered this one predictable. If predictable, then the defendant is obliged to have prepared for it.
3. The consequences must have been unpreventable.

So, even though it exists in civil law it is not a get out of jail free card.

International law

The UNIDROIT Principles encompass force majeure as follows:

Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.