COVID-19 Professional Services: Contracts – considerations for solicitors
Market Insight18 May 202018 May 2020
UK & Europe
The unparalleled response to the Covid-19 pandemic has resulted in significant business interruption globally, which will undoubtedly lead to an increase in contractual disputes as contracting parties attempt to mitigate losses suffered as a result of the pandemic
As history demonstrates, following times of economic crisis there is a corresponding uptick in claims against professionals, and solicitors in particular may expect to see an increase in Covid-related negligence claims arising from work done on, or in relation to, commercial contracts. We discuss below key contractual principles relevant to the Covid-19 pandemic, and the consequent areas of risk for solicitors giving advice in this area.
The key contractual provision that will be subject to scrutiny amid the Covid-19 pandemic is the force majeure clause, which can offer protection to a contracting party where performance of the contract has been hindered or prevented by an event outside of its control.
There is no general principle of force majeure at law. This must be specifically included as a term of the contract, and the wording of any force majeure clause is therefore going to be critical to determining its scope and effect.
The interpretation of a force majeure clause is done on a case-by-case basis, and will also depend upon the context of the agreement as a whole and the specific facts of the situation. Our colleagues Tim Crockford, James Roberts, and David Milner explore specific force majeure events further here.
In order for a force majeure clause to apply, the party seeking to rely on it must have taken all reasonable steps to avoid or mitigate the relevant event. In the context of Covid-19, government guidance and regulations will be an area to consider; for example, if the government prohibits retail trading except for businesses that implement prescribed safety measures, a business that elects not to do so to avoid incurring additional expense would be unlikely to be able to rely upon the force majeure clause.
Although it will depend upon the particular wording of the clause, many force majeure clauses exclude foreseeable and/or foreseen events. Foreseeability, or rather lack thereof, is not a prerequisite for a force majeure event; however, if foreseeable risks are not provided for specifically in the drafting of the contract, it could be said that they were within the contemplation of the parties when the clause was drafted and therefore they were not intended to be a covered risk. Although Covid-19 was unknown to the world a year ago, by the end of January 2020 the World Health Organisation had declared it a "Public Health Emergency of International Concern" and, therefore, after this point, it could be said that contracting parties were on notice as to the looming pandemic. It is worth noting that this date will probably be the cause of considerable debate in the near future, and will ultimately depend in each case on variables such as the nature of the contract and the geographical location of the parties.
If there is no force majeure clause in the contract, parties may be able to rely on the common law doctrine of frustration.
The doctrine may apply, if, as a result of the coronavirus pandemic, performance of the contract has become legally or physically impossible, or circumstances have rendered performance of the contract radically different from what was originally agreed by the parties.
Frustration will only respond if performance of the contract was rendered impossible (as opposed to simply more difficult) due to an event or circumstances beyond the control of the parties. A potential example might be widespread sickness or self-isolation which results in insufficient staff to fulfill the contract; however, staff absence due to Covid-19 must be the only reason that performance of the contract is impossible. If the staff shortage was also due to poor logistical planning on the part of the business, the contract would not be frustrated.
Unlike a force majeure clause, which usually provides for the parties to suspend performance of a contract, or excuses liability for non-performance, a frustrated contract ends automatically; the parties are excused from all further performance; and they are not liable for damages for non-performance. Accordingly, the parties are provided with less certainty or control over the effect of a frustrated contract than those which contain robust force majeure clauses.
Although frequently considered alongside frustration, illegality is a separate doctrine, and a matter of public policy, which states that a contract is discharged if its performance is rendered illegal by English law.
No doubt many contracting parties will attempt to argue that its obligations were rendered illegal by new legislation implemented by the government to control the virus; however, this doctrine requires the illegality to prohibit performance (as opposed to making it more difficult) and both the contract and the legislation will need to be carefully reviewed to ensure that a party was genuinely unable to perform.
Impact on Law Firms
Given the sheer volume of contracts likely to be affected by the Covid-19 pandemic, and the fact that many commercial clients will be under economic strain, law firms face a potential increase in negligence claims as clients attempt to recoup losses where they see potential to do so. In particular:
Most obviously, law firms face potential claims where there are no force majeure or equivalent performance-excusing terms in clients' contracts. Where there are such terms, law firms will be called upon to advise on their interpretation and effect, in circumstances where many of them will not expressly deal with pandemics (and may also have been drafted by the firms themselves). In the context of an unprecedented event like Covid-19, some of these clauses will not respond and there will be uncertainty around many others – creating risk both for the drafting and (if different) potentially also the advising firm. For example, if a client is advised to terminate a contract on the basis of force majeure without proper grounds for doing so, this may constitute wrongful termination, a repudiatory breach entitling the other party to terminate the contract and seek damages.
Advice on frustration and illegality will undoubtedly also be sought, and solicitors will need to ensure that they understand the Covid-related legislation that might affect contracts from time to time. This represents an additional challenge to solicitors in circumstances where the legislation is new, unfamiliar, and has been brought in at very short notice.
In advising clients on the response to a contractual dispute, solicitors will need to ensure that all options are considered (e.g. is a negotiated solution with the other party a better option than invoking a contractual right?) and that contracts are thoroughly reviewed. For example, notice requirements may apply to a party seeking to exercise its rights under a force majeure clause.
Where mitigation of losses is not possible, or where a client believes that a force majeure provision will respond but this turns out not to be the case, law firms involved in the drafting of the contract may face claims e.g. for an alleged failure to (i) ensure the responsiveness of the force majeure clause; (ii) provide for a foreseeable event; or (iii) provide adequate advice as to contractual risks.
Differences between the English common law and the broader Civil law position on force majeure present further potential pitfalls where there is a cross-border element to a contract or series of related contracts.
Finally, law firms will need to be alert to the possibility of a conflict of interest arising, for example where a firm is advising a client on the effect of a force majeure clause that it drafted, and an issue arises with the drafting of that clause. Paragraph 6.1 of the SRA Code of Conduct prohibits a firm from acting if there is an own-interest conflict, or a significant risk of one arising, between the firm and the client. Firms will need to be alert to this and any other conduct issues that may arise before advising further. Regulatory scrutiny in the COVID-19 era will be the subject of our next briefing.