The first thing to say is that COVID-19 has not changed contract law. The same rules apply now as have always applied.
In a very small number of special situations, the existing rights of enforcement have been temporarily suspended. For example, landlords are not currently allowed to begin eviction proceedings for tenants who are up to 3 months behind in their rent. But the underlying obligation to pay rent has not gone away.
Other than those special (and temporary) situations, the law is applied (and sometimes blatantly ignored, yes, I am looking at you, airline industry) in the usual way.
So, you have not performed your contractual obligations, or a customer has not performed theirs: what are your next steps?
The first point to make is that contract law has never been a fan of the Old Testament principle of “an eye for an eye”. If the other side from you on a contract has not met their obligations, that does not allow you to ignore yours. More on this later.
The second point I would like to make is that contract law views each contract between parties as free-standing. You might have 200 contracts outstanding (e.g. if you supply a supermarket chain), but you cannot set-off. Setting off means “I owe you 10 under this contract, but you owe me 5 under that other contract, so I will just pay you 5, and we will call it quits”. Do that and you will be in breach of contract if the other party does not agree to the set-off.
Here are the steps I would take to analyse your situation if you consult me:
What Does Your Contract Consist of?
The first part of your analysis of where you stand in a potential contractual breach situation is to know what your contract actually consists of. Some contracts are self-contained documents drawn up by people like me. But many are messy things comprising an email thread, perhaps some WhatsAppp messages, some standard terms and conditions off your website and what was said during a very strained telephone conversation with the other party. A contract can be formed orally, in writing or through your actions, or a mix of these.
Who Are the Relevant Parties?
A classic contract is between party A and party B. Real life is more messy. Other parties can become involved (family members, group companies, executors administering a Will, etc.). Look to see who did what, who is the person doing the breaching, and who is the ‘victim’ (that is not a term we use in contract law, but it works as shorthand here). If all the parties are throwing around allegations like confetti, then some parties may find themselves both ‘perpetrator’ and ‘victim’ at the same time.
What is the Actual Breach?
People often conflate bad, dishonourable or immoral behaviour with a breach of contract. The two are not usually connected (although the law will not recognise the existence of a contract for an illegal purpose, so you cannot sue somebody for failure to carry out a hit that you paid them to do). On the other side of that same coin, being right is not a bullet-proof vest. You can be totally in the right but legally in the wrong. What contract law does is force you to honour the terms of your agreement, regardless of whether it is stupid, distasteful, economically ruinous for you or just the worst deal ever.
So, identify the actual breach by reading the contract very, very carefully. The precise meaning of every word potentially counts. People who skim read contracts clearly like taking risks.
Is the Breach Major or Minor?
I mentioned earlier that just because the other party has breached their obligations under the contract does not allow you to automatically ignore or breach yours. What you can do depends on how serious the breach is. If it is a major breach (they have not paid) then the default position is that you are entitled to end the contract immediately and claim damages. If it is a minor breach (you promised to deliver 10,000 cups, but actually delivered 9,998 or 10,002 then the law says you must either continue the contract and claim damages if you have suffered any loss from the breach or just carry on and ignore the breach. If it is a major breach and damages would not be a sufficient remedy (e.g. the funeral home will not return mum’s ashes) you can ask the court to force the other party to do what they promised to do - which is called seeking specific performance.
I said “…the default position…” because often contracts will address ahead of time what happens if certain obligations are not met. Depending on how the contract is written, it may not even amount to a breach, it may just take the contract down a different route.
Does Your Contract have a Force Majeure Clause?
An FM clause, if you have one in your contract, usually addresses what happens if something major (like, COVID-19) comes along and stops one or both parties from fulfilling their contractual obligations. What happens depends entirely on what the FM clause says. Some just freeze everything for a few months, others allow termination, others require the parties to find alternative ways to perform the contract. The most effective, but also the most boring to read, will cover all these things. Prior to COVID-19, pandemics were not really on people’s minds, and so many FM clauses do not cover them, rendering the clause irrelevant. FM clauses are not implied (‘implied’ means that the court will assume that the clause is in the contract even if you don’t add it).
Is the Obligation Allegedly Breached Mandatory or Discretionary or Conditional?
Look very closely at the wording used:
- - “Party A shall deliver 10,000 cups to Party B within 30 days…” is pretty definite, and so will be hard to wriggle out of.
- - “Party A may deliver 10,000 cups to Party B within 30 days…” or “Party A shall use reasonable endeavours to deliver 10,000 cups to Party B within 30 days…” or “Provided Party B has done XYZ, then Party A shall deliver 10,000 cups to Party B within 30 days…” all give a lot more wriggle room!
Does it Look Like the Other Party Will Breach?
Previously I have said that if the other side does a major breach of the contract, then you can either end the contract and sue, or continue to perform the contract and sue (or indeed ignore the breach completely and just carry on).
But what if you know the breach is coming, it just hasn’t happened yet? If you stop performing first, then maybe they can allege you are the one in breach.
Well, the law has a remedy called “anticipatory breach”. Provided you can show that they were going to breach (or at least justify it as a reasonable belief), you can be let off your obligations. So, if your obligation was to deliver 1,000 beef burgers to a fast food restaurant, but you knew the restaurant was closed because of lockdown and there would be no one there to take delivery, then you would not be expected to waste time and money loading and driving a van full of burgers to an empty shop. The moral is don’t focus just on you – what about them?
Next, We Look Outside the Contract
If the wording of the contract itself does not help your position, then next we look at some legal principles that you may be able to rely on. A word of caution though, for the most part, the wording in a contract is sacrosanct. The courts do not try and look at the intention of the parties if the clear and ordinary meaning of the words used (assuming they are not context-specific jargon) is clear.
I need to give a small lawyer’s caveat here. These principles are old. Some are positively ancient. That means they have been poured over by the courts for generations. The law is complicated and subject to numerous exemptions, special circumstances, caveats and conditions. To see whether it will apply in your situation requires an analysis of your situation and its unique facts.
The Principle of Frustration
As a starting point, if performance of a contract becomes more difficult or uneconomic, tough - the party who fails to perform is liable in damages.
Frustration is an exception to this. A contract may be terminated on the basis of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation.
This is the closest the law gets to implying a force majeure clause, but although apparently similar, they are not the same thing at all.
Generally speaking, a ‘frustrating event’ is an event which:
- occurs after the contract has been formed;
- Is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract;
- Is not due to the fault of any party to the contract;
- Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.
The doctrine has been around for over 150 years, and as be developed by various court decisions, some of which actually contradict each other (migraine time for lawyers) - so the law is quite complex, but in essence, frustration may apply, if, as a result of COVID-19, performance of the contract has become legally or physically impossible through no fault of the parties.
It will not be frustration:
- If the contract deals with the situation (e.g. there is a relevant force majeure clause); or
- If the parties to the contract should have foreseen (or did foresee) the frustrating event, when they made the contract.
The exact circumstances of each case will be crucial. By way of example, if a sports clothing company contracted with a TV channel to show adverts during the half times of specific football games which because of COVID-19 were then cancelled, the sports company would have a strong argument to claim frustration.
BUT they would not be able to rely on frustration if their contract with the TV channel simply stipulated the times and dates when their adverts would run (those times and dates having been chosen to coincide with the football matches’ half-times of course).
In the former case the matches no longer existed and therefore the relevant break time did not exist either. In the latter case, The TV channel was still able to run the adverts at the agreed dates and times except they might be sandwiched between old soap repeats instead - but because the contract could be completed there was no frustration (in the legal meaning of the term anyway...).
The consequences of a contract being deemed frustrated by the court after a court case is that the contract ends automatically and immediately, without any action by the parties, who then have only very limited rights of redress from each other (basically the losses fall where they fall).
The Principle of Illegality
A principle of English law is that the court will not enforce a contract which requires something illegal to be done (e.g. a contract to kidnap somebody).
When as part of the COVID-19 lockdown, the government ordered various businesses to cease trading such that they could not continue in business without breaching that order (and thus be acting illegally) then those businesses could potentially seek relief from claims against them under the doctrine of illegality.
The problem is that the doctrine has been established through various court decisions, some of them (yes, you’ve guessed it) contradictory.
Therefore, the starting point is to review the statute or other regulation that makes the act illegal. Then decide whether the statute prohibits performance of the contract or just part of it, and if just part of it, whether that could be worked around in a legal manner. For example, many cafés were able to keep operating by providing a takeaway service, so quite a few of their contracts may not have been illegal to perform, even if in real life actual performance was heroically pointless and economically ruinous. Those things are not illegal. As with force majeure and frustration, illegality cannot be relied upon just because it makes compliance with contractual obligations difficult or uneconomic.
Are There Any Technicalities That Can Help?
For those of my colleagues who spend their time litigating contracts, there appears to be a hierarchy of defences/attacks.
At the top is: contract interpretation - does the actual contract tell you whether you are in breach of not?
Next, you look to see whether there are any legal principles you can rely on.
Failing both of those, the next step down on the ladder is looking to see whether there are any technicalities that can help you even if the actual case is not to your advantage. Some of the things lawyers look at are:
Does the Contract Have Any Trips-ups or Traps?
Previously we looked at analysing the contract to see whether or not there was actually a breach. There is a second level of contract analysis that may be relevant if there is indeed a breach. These are the clauses in the contract that business-people tend to assume are peripheral, almost to the point of irrelevancy. There is even a term for many of these clauses: boiler-plate clauses. They are often given scant regard because the popular conception is that they are unimportant.
It can be a big mistake to rely on popular conceptions when it comes to the law. In contractual terms, the court treats every single clause as being of equal importance.
An example of another popular misconception is the concept of the non-executive director. That is a short-handed business term used to describe directors who are not really involved in the day-to-day running of the business, and so who can (in theory at least) step back and consider the bigger picture.
Except the truth is that in law you are either a director or you are not.
In terms of legal compliance, obligation and legal liability there is no difference between a non-executive director and the managing director – as many NEDs find out when things go wrong, and they find that they are not treated any differently from the ‘executive’ directors who actually caused the problem.
In contract terms, this equality of clauses can catch people out very easily. If buried away in the boiler-plate notice provisions is a sentence or two that says:
“Both parties shall be deemed to have waived their right to take action for any breach unless they serve notice to the breaching party within 28 days of the date on which they became aware (or should have become aware) of the breach.”
Even more insidious, the clause might go on to say that if they do serve notice they have to serve it addressed to the company’s registered office. It is all too easy to overlook such a provision if the company’s main place of business is not its registered office. So, on a minor technicality like that, strong and major claims for breach may fail.
Another common provision which is often overlooked is a dispute resolution clause which requires mediation or arbitration. In my experience, when emotions are running high and one or both parties are demanding the matter go straight to the highest court in the land, such provisions are ignored. But the court will not ignore them and will most likely throw out any claim brought without even giving it proper consideration.
Another technicality that catches people out frequently is something called “deemed waiver”. The law assumes that if there is a contractual dispute then the parties will act rationally and with consideration. In my experience, that is rarer than you might think.
The messy reality of commerce means that things may fester for quite some time before becoming an open conflict. However, the court expects parties to respond immediately and decisively to major breaches of contract. Where they do not (i.e. most businesses) they run the risk of being deemed to have waived their right to complain later. In other words, the court says
“Party A broke the contract in the most serious manner, but for the next three months you carried on with business as usual: you lost your chance to complain, it is too late.YOU did not treat it as serious, so do not ask us to (you hypocrite you…).”
Last Chance Saloon
If none of the above assists, then you may find yourself, as so many do, so often, having to play the ball instead of the man - in other words, your claim or your defence is rubbish, so you are going to have to see if there are any weaknesses in your opponent you can manipulate or smaller ancillary principles you can pull in to your advantage.
The first is a simple one – was the contract on either side properly signed by a sufficiently senior person with the proper authority – it’s surprising how often this is an issue.
Next, look beyond the strength of the claim to see what the consequences of winning/losing are.
The purpose of damages in contract law is to put the wronged party back in the position they would have been in had the breach not taken place. Calculation of damages is an incredibly complex area, but for the purposes of this article you should assume that if you brought a court case for breach you would look to be awarded the profit you would have received had the contract been performed. So, rubbish expected profits = rubbish damages.
The court normally looks to pay out your direct loss, not your indirect or consequential loss. So the fact that you claim that you would have used the profit to invest in Bitcoin just before its latest bubble surge and so your loss is actually a hundred times greater than just the lost profit on the contract is a hard sell to make to a generally sceptical court.
Further, you will need to take into account the legal principle of “mitigation of loss”. If the other party was going to buy your 1000 fresh, organic, beef burgers for (say) a profit of 10, then you cannot sit back and claim 10 if you could have sold those beef burgers, even at a fire sale price of 3 to, say, a hospital canteen. The court will expect you to have done so. It will expect you to have at least tried to lessen (mitigate) your loss. It is likely the court would award you 7 as a result.
Since the court likes to award for actual loss, not paper loss, then it is important to see if the wronged party had insurance. If they had insurance, then they may not have suffered any loss other than the cost of the insurance premium. It is very unlikely that both the court and the insurance company will payout.
Another factor is the nature of the legal wrong. There are three main types of legal wrong that people sue each other about:
- Contract claims
- Claims in tort (of which negligence is the best known)
- Claims in equity
The first two are what are called legal claims - in other words, they are claims asking for money. The third claim is an equitable claim. It is asking the court to use its power to either force somebody to do something (specific performance, mentioned earlier) or to force someone not to do something (an injunction). Equitable claims, by their very nature, tend to be more complicated and nuanced. The court is also generally more reluctant to force somebody to do something or not do something because the sanction for failure to comply is usually gaol (or jail if you are under 50).
I said earlier that in contract law the court does not care about morality unless it is a major issue. That is not true for equitable claims. There is a saying that someone who makes an equable claim must do so with “clean hands”. That doctrine, and a few others like it, basically mean that the court will be reluctant to grant somebody’s equable claim if they themselves have been acting poorly. This comes back to the behaviour of your opponent and may torpedo their claim.
The final major factor to consider is the one which probably determines more potential claims than anything else - the cost of bringing a legal action.
The cost in time, money and emotional stress can be absolutely phenomenal. Only the very smallest tip of the dispute iceberg makes it into court. The majority of claims are never pursued because of the cost.
Even when claims are pursued, the majority of people who win a legal case feel like they have lost. They were owed 10, the court awarded them 8, their legal fees were 4 and the business they lost by litigating instead of doing business was 5. Even though they won, they ended up with -1.
Another popular misconception is that the loser pays the winner’s legal fees. Typically (and for reasons that are outside the scope of this article) losers typically reimburse only around 60% of a winner’s legal fees - that is assuming they pay anything at all, and do not just go into insolvency or ignore the court order.
Conclusion
So, other than the advice to think very carefully before engaging in litigation, what is the main takeaway from this article?
It is that a contractual dispute can be a battle fought across many battlegrounds - some of which you are only dimly aware of, but which may determine the outcome.
That leads me onto a personal opinion formed after many years’ observation: law is just a tool and litigation is just a tool. They are tools used by people. The carpenter decides how the wood is worked, not the chisel. The same in litigation. Many a strong case is either lost (or more likely goes nowhere in the first place) because the client does not like confrontation, does not have the money, does not want the matter to get into the press, does not want to devote the huge amount of time it would take to bring a case. Equally, I have seen people with very poor claims or defences succeed because of their aggression or persistence or willingness to spend the time and money just to grind the other side down.
Without in any way diminishing the often life-changing implications of breach of contract, it really often seems to play out like a poker game. How you present yourself and your attitude can be more important than the quality of your claim or defence (especially if it will take time and money to even work out the strength of your position).
Obviously this is fairly irrelevant if you are serving or going to be sued by the government or Facebook. But for smaller disputes where the deciding persons (often called the “controlling minds”) have personal skin in the game, and it is not just another file on their desk, then working out how they will act/react (if I can) will inevitably be one of my first considerations.
Although this article of necessity strayed into the field of litigation, I am a commercial lawyer and when I am involved in contract disputes it is usually with the hope of avoiding litigation. Those are the cases I like!