The impact of COVID-19 on calculating damages for breach of contract

28 April, 2020

One impact of the Coronavirus pandemic is to create greater uncertainty around the calculation of damages for contractual breaches.

 

The General Rule

The general rule is that damages for breach of contract are assessed on the date of the breach.

However, the “date of breach rule” does not apply to all contracts. Even in cases when the rule applies, it may not be adhered to, if to do so would result in injustice. As is the case with many general rules, there are a number of exceptions.

 

“The Post Termination Event” exception

Departing from the general rule, The Golden Victory case established that post termination events could be taken into consideration when assessing damages.

The post termination event in Golden Victory was the outbreak of war. It was held that if a contract for performance ends due to a serious breach and it is ascertained that the contract would have ended early anyway because of a post termination event, that event must be taken into consideration when deciding the amount of damages payable for the breach.

The decision in Golden Victory was later upheld in Bunge v Nidera where the post termination event was a legislative embargo which would have prevented the seller from selling wheat to the buyer. The court held that there is “no principled reason” to ignore what would have happened (the post termination event) had the breach of contract not occurred.

It is highly likely that a global pandemic, such as COVID-19 would fall into the post termination event category, that would require consideration when assessing contractual damages.  With a countrywide lock down and strict social distancing guidelines imposed on those who do go out, many companies who rely on the movement of individuals have been forced to cease trading.  A party that was in breach of contract prior to COVID-19 may seek to rely on the pandemic to reduce the amount of damages payable by asserting that the contract could not have been performed anyway.

 

Thus there is an element of uncertainty when it comes to working out who is ultimately going to have to take a hit in the event of contracts being breached.

 

 

April 2020

 

Cases:

The Golden Victory [2007] 2 AC 535

Bunge SA v Nidera BV [2015] UKSC 43