In all the uncertainty currently presented by COVID-19, there is understandably growing concern about how business will be affected. What are the rights of each party to cancel a contract, and what will be the likely impact of this? Perhaps you are a venue provider, and you are receiving enquiries from customers who wish to postpone or cancel. Or perhaps you are being asked to tell your customers what will happen in connection with their contract in light of the pandemic.
This guide looks at some considerations concerning consumer contracts in light of the issues posed by COVID-19. The intention of the guide is not to advise you on your position (which will depend on the terms of your contract and the facts of your case). If you would like further explanation of any points in this guide, or advice on your particular case, please contact Claire Boucher.
The Terms of Your Contract
What are the Terms that Apply?
As a starting point, it is important to establish the terms that apply to your contract. To do this, it is essential for every business to understand when a contract is formed.
Many businesses have a document which sets out their Terms and Conditions. In practice, however, many businesses fail to incorporate those Terms and Conditions into their contracts and so they are not afforded the intended benefits of those terms. In order for your Terms and Conditions to be incorporated into a contract, they need to have been agreed at the formation point. Usually, you cannot include terms after the formation point unless the other party agrees (and the contract is thereby amended).
Common mistakes include not sending out Terms and Conditions at all or providing terms after the formation point of a contract, such as on the back of an invoice raised after the contract is formed.
Once you have established the terms that apply, those terms will need to be reviewed carefully. It is better for this to be done by a legally trained person, as there are many considerations arising from consumer statute law and common law principles, that may apply to, and affect, the interpretation and enforceability of your terms.
It is common for written contracts to include terms dealing specifically with each parties’ right to cancel (or terminate) and what will happen in the event of a cancellation or termination. Any cancellation or termination clauses should be reviewed carefully, and again, preferably by a legally trained eye.
If a party seeks to cancel or terminate a contract when there is no right to do so, the cancelling party could be liable to the other party for damages arising from breach of contract.
In addition to clauses dealing with cancellation, it is common for written contracts to include what is known as a “force majeure” clause.
The intention of a force majeure clause provide a party relief from its contractual obligations in the event of a disruptive event which is outside of the party's reasonable control. Force majeure is only recognised in English law if it is specifically provided for in the contract. There is no judicially accepted definition of force majeure, so its meaning must be expressly set out in the clause, and the clause upon which a party seeks to rely must be carefully considered to determine its scope and effect.
Whether or not COVID-19 is a force majeure event will depend on the wording of the relevant force majeure clause. Legal advice should be sought on this issue.
Other Relevant Contractual Terms
In the event that the Government passes emergency legislation or provisions as part of its strategy to deal with COVID-19, it is important to consider whether your contract includes any clause which provides for any “get out” in the particular situation and/or excludes any liability arising from a situation imposed by a change in the law, or a change in regulation.
If your contract does not provide for such a “get out”, or an exclusion, and you are unable to fulfil your obligations under the contract – even if this as a result of newly imposed Government policy - then you could still be liable to pay the other party damages for the losses they have sustained as a result of you not being able to fulfil your obligations under the contract.
If you are in the business of providing a venue for events or gatherings, consider whether Government advice or emergency legislation does actually prevent you from fulfilling your obligations under the contract. If your obligations are limited to only providing a venue, and you have no obligations concerning organising the event itself, you may be able to fulfil your obligations, regardless of any emergency legislation banning mass gatherings. If your customers then postpone or cancel (even if they are forced to as they are the organiser of a gathering that is now prevented by law), you may still be able to rely on the cancellation and termination provisions in the contract, and particularly, any right to receive payment.
Consumer Protection Legislation and Onerous or Unfair Terms
The fact that people do not always read Terms and Conditions means it is tempting to put in terms which are onerous (e.g. a clause seeking to totally exclude liability under a contract in certain circumstances). A potential issue that may arise in any COVID-19 dispute is whether or not a clause that is being relied upon to the detriment of the consumer, is unfair.
By virtue of section 62(1) of the Consumer Protection Act 2015, an unfair term in a consumer contract is not binding on the consumer.
Section 62(4) provides “a term is unfair if contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations under the contract to the detriment of a consumer”.
Section 62(5) provides “whether a term is fair is to be determined –
(a) taking into account the nature of the subject matter of the contract
(b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.
Legal advice should be sought in connection with any term or clause that is suspected to be (or alleged to be) unfair and therefore not binding.
Common Law Considerations
Frustration is an English contract law doctrine that acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party's principal purpose for entering into the contract.
If a contract becomes impossible to perform as a consequence of COVID-19, it may be open for a party to claim that it has been frustrated.
The legal doctrine of frustration is an extremely complex area of law in connection with which, legal advice should always be sought.
The Insurance Position
In the event of a legitimate cancellation or termination that leaves you with a loss and without any recourse against the other contracting party, you should consider your insurance position.