When a company cannot complete work as agreed under a Contract the remedy is for the innocent party to seek compensation or damages for breach of contract or as an alternative (and in some cases it may not be appropriate) to seek a Court Order for specific performance if the contracting party is not able to perform and complete the work it has agreed to do. Usually, however, the claim is for monetary damages because the supplier is unable to complete the work or get others to do so on their behalf in a timely manner.
Damages are awarded to compensate for loss as opposed to liquidated or agreed damages which would have been agreed in terms of the contract in advance by the parties and recorded in writing. If damages are not prescribed, then the normal contractual rules of putting the party in the position they would have been had there been no breach of contract apply.
The net loss is calculated on this basis and can lead to a more costly outcome for the party in breach. If, for example, I had agreed to do xyz at a particular rate of say £1,000 and I was unable to carry out the work which cost ultimately £2,000 for an alternative contract or to complete, I would be liable to pay £1,000 damages for breach of contract to put the customer back in the position he would have been (or expected to be) in had I complied with my contractual obligations. One word of caution is that the cost of rectifying the breach of contract should not be unreasonable as to be a failure to reduce or mitigate the loss occasioned by breach or break the chain of causation. It would be unreasonable and disproportionate, therefore, if the customer set out to deliberately complete the work in an excessive or over-expensive fashion.
There is a duty to act reasonably if you have been the victim of a breach of contract claim and to mitigate loss. Mitigation of loss requires the injured party to ensure that they do not make matters worse. It is a commonsense approach rather than “lets see how expensive we can make this for the party in breach of contract”.
A supplier of goods and/or services can have written terms that limit the amount of damages. Certain categories of loss such as death or personal injury cannot be restricted but it is possible for example, to agree in terms of business or other written contractual terms to limit contractual damage to the contract value or to an amount limited to the value of indemnity insurance. Terms must be reasonable and proportionate to be enforceable. For example, it would not be reasonable to limit claims for breach of contract to £1 as a contractual term but possibly to £10,000 if the cost of the work was in fact £10,000 or thereabouts.
Force Majeure to be effective must be included within the terms of the contract and must include the event that causes the contract and work to be done pursuant to the contract to be suspended. If a contract included a clause to say that the contractual obligations could be suspended due to a pandemic, for example, that would befit the circumstances of the Covid pandemic. If, however, when restrictions ended or it applied to key staff being off ill when they are recovered, it is envisaged by the parties (hence the clause) that the contract will be continued to be performed. It is essential to look at the contractual terms if you are likely to be in breach of contract and to demonstrate that the scope of the clause clearly fits the circumstances and the facts fall squarely on all floors with the cause of the delay.
In Force Majeure clauses parties agree to suspend the contract, or excuse liability for not doing the work as opposed to releasing one of the parties from the contract. It may be possible and consideration should be given to whether the contract can be terminated at that point.
After Force Majeure the legal doctrine at common law is frustration. Frustration can assist a supplier and applies even if there is no specific written clause in the contract. It applies under common law principles in other words.
To quote from Davis Contractors Limited v Fareham UDC [1956] AC696 “frustration occurs whenever the law recognises that without default of either party a contracted obligation has become incapable of being performed because the circumstances in which performance is called for work render it a thing radically different from that which was undertaken in the contract”. “Non haec in foedera veni” “it was not this that I promised to do” Lord Radcliffe at paragraph 729. In more recent cases this principle has been referred to as the starting point which makes sense and to deal with the question of frustration it is necessary to establish whether this was the cause of frustration reasonably in the contemplation of the parties at the outset. If so, it is unlikely the contract will be frustrated at common law.
Frustration is about impossibility. An old case about an opera singer falling ill and being unable to perform is a straightforward and standard example of frustration of contract. A further example of frustration is where a specific potato crop from a particular location was ordered. This contract was frustrated by the crop being diseased and alternatively sourced potatoes from a separate location were not in accordance with the contract. The Coronation cases caused by King Edward VII’s abdication also provide examples of frustration. The King wasn’t crowned because he abdicated and bookings for prime spots to watch the procession were cancelled. In these circumstances the Courts held that various contracts were frustrated therefore not enforceable.
Force Majeure by comparison causes a temporary suspension of the contract, frustration will discharge a contract. All rights and obligations are therefore ended. However, issues arise where part-performance is claimed and that cannot be undone and the contract is usually not void from the start.
The Law Reform (Frustrated Contracts) Act 1843 also should be considered. Section 1(2) allows claims for money paid before discharge. Section 1(3) allows for recovery of non-monetary benefits.
The Courts approach has not really been determined and perhaps this is something which will be decided at some stage in the Court of Appeal and it is reasonable to expect some cases to arise following the pandemic.
In terms of illegality, statutory provisions may prevent a contract from being performed such that its performance would be illegal. Force Majeure or frustration are generally outside of the parties control and also the statute book can be seen this way as well.
Insurances are very relevant consideration for suppliers to protect their interest and they should cover:
- Force Majeure issues such as the pandemic, labour shortages, events, which are reasonably foreseeable but outside the parties control;
- Ensure that the terms are put before insurers and cover agreed and pricing the contract accordingly to take account of the cost of insurances; and
- Consider illegality and make sure that there is insurance put in place in the event that a contract is rendered illegal, not just in this jurisdiction but if it is to be performed in foreign jurisdictions in those jurisdictions also.
My advice would be very specific, to focus on the risks and have a backup Plan B to make sure that you have the maximum possible cover on insurance and practical solutions. It is advisable, therefore, to instruct lawyers to engage in this process from the outset particularly if it is a valuable and expensive contract.
Chris Else is managing partner at Else Solicitors and can be reached at chris.else@elselaw.co.uk.