Coronavirus Cancellations: What should businesses do when faced with cancellations and contract terminations caused by Covid-19?

12 January, 2022

In December 2021, in the face of the rapidly spreading Omicron variant of coronavirus, the government reissued advice to work from home, where possible, and to limit social interactions. Over the next few days, the media published photographs of deserted shopping streets, restaurants without patrons, and empty train carriages. It would appear that the public heeded the Prime Minister and Professor Chris Whitty’s advice to think carefully about the social gatherings worth attending, in order to “save Christmas”, but what did – and does – that mean for businesses for which “saving Christmas” relied upon social gatherings taking place, and which, prompted by government guidance, saw a wave of cancellations and contracts terminated?

 Can my business sue the government?

In short, no. Where cancellations or terminations have occurred, the usual recourse would be an action for breach of contract, and such a claim can only be brought by a party to the agreement. At its most basic level, where one business has failed to fulfil its obligations and this has caused the other party to suffer loss, it may be possible to recover a proportion of those losses. The first step is to review the contract.

How do I know what terms apply?

As it is common for businesses to seek to contract on their own standard terms, where this arises between multiple parties, it can be difficult in the case of a dispute to determine which parties’ terms should apply. The usual rule is that those terms and conditions presented last during negotiations, which were not rejected by the other party, take precedence.  

Okay, what terms specifically do I need to look for?

Express Terms

Consideration should first be given to the terms that are explicitly included and agreed by the parties to the contract – these are the “express terms” (there are also “implied terms” which are discussed below). The important clauses to look out for are those concerning what each party is obliged to do under the contract (to be able to determine whether those obligations have been breached), how the contract can be terminated, and what the consequences are of a breach or a termination.

An assessment could also be made for any “force majeure” clauses. A “force majeure” clause is a term incorporated into the contract that will alter or absolve the contracting parties of their obligations under it, where they are prevented from performing such obligations due to circumstances beyond their control, often colloquially referred to as “an Act of God”. It is perhaps not difficult to see how a coronavirus pandemic could fit this definition, but a force majeure clause must be explicitly included in the contract – it cannot be implied into it.

Implied Terms

Implied terms are those that are not explicitly included by the parties to the contract, but can be implied into the agreement either by law, previous dealings between the parties or to reflect the custom of that particular industry.

A frequent example is in respect of the provision of services. The Supply of Goods and Services Act 1982 implies a term into business-to-business contracts that services will be performed under the contract with reasonable care and skill and in a reasonable time.  

Breach of an implied term permits the non-breaching party to claim for losses in the same way as a breach of express terms. However, given the range of ways under which an implied term may arise, it is best to seek legal advice to determine whether any may apply to your specific circumstances.   

Remedies

As a general principle, contracts need to be performed as intended, and as such, short of any terms to the contrary, coronavirus is no excuse for a party to renege on their obligations. Once the terms have therefore been established, to ascertain what recourse is available as a result of a cancellation or termination, certain questions must be determined, such as: has a term (express or implied) been breached? Is there any clause, such as force majeure, that can be relied upon to justify the breach? Has this caused the non-cancelling/non-terminating party to suffer loss? Do any of the terms in the contract set out what remedy is available?

The non-breaching party must also take steps to mitigate their loss, or in other words, try to limit the harm caused to them by the breach. As an example, and depending on the circumstances, this could mean that they seek a new supplier or an alternative delivery method.

Monetary compensation (damages) to reflect the losses suffered by the non-breaching party is the usual remedy, which can include loss of profit. In some instances, where there is an ongoing relationship and the breach in question concerns only part of the contract, the non-breaching party may elect to terminate the contract or they may wish to accept the breach and continue with any remaining obligations. In both instances, a claim for damages is usually also available.

Great, I’ve reviewed the terms – what next?

The best outcome when faced with a potential dispute is one that ensures that commercial nuances, such as cash flow and concurrent obligations to third parties, are also taken into account. These should be considered alongside the legal recourse before choosing the most appropriate course of action. We can work with you with these commercial factors in mind to review contractual terms, and to advise on the best way forward for your business when faced with disruption due to coronavirus.