Assessing the impact of COVID 19 on contracts

Jeremy Berg
22 April 2021

As the UK started the year in 2020 it still enjoyed free movement of people, which was due to end by December 31st 2020, but few would have imagined that their movement would be restricted not only by Brexit but by COVID 19.

Few would also have anticipated in mid-March 2020 how extensive the impact of the virus upon them would be, including in relation to contracts. The change of economic circumstances and the losses of profit which resulted from the imposition of social distancing and restricted movement have left parties facing unexpected difficulties which were not contemplated by the initial contractual terms agreed.

From personal experience, I recall sitting around a table with senior officers from a major clearing Bank on 9 March 2020, and the response of denial and indignation when I suggested that they would soon face having to close their offices and possibly lay off staff. Two days later, on 11 March 2020, the virus was official upgraded to the status of World-wide Pandemic.

Adversely affected parties have had to see whether new terms can be negotiated in the new circumstances or, ultimately, consider how a court might deal with the change of circumstances. Traditionally, courts will tend to uphold terms agreed between the parties rather than to decree that some additional protection ought to be given to the party requiring it, due to unforeseen circumstances outside of the parties’ control, but the courts’ response might depend upon the particular circumstances in each case: a court might, for example, look at the background to a matter and the exchanges between the parties in order to assess the intention of any agreements entered into in response to the COVID 19 pandemic.

If there is any doubt as to the meaning and effects of any terms agreed between the parties a court might consider the surrounding circumstances including correspondence between the parties and apply a purposive effect to the construction of the contract based upon the intentions demonstrated by each of them preceding the terms agreed by them especially if such discussions took place in the light of the COVID 19 pandemic.

Factors considered by a court might include the impact of COVID 19 on the ability to perform the contract, an assessment of what steps have been taken in mitigation of any adverse impact and how such impact has been dealt with between the parties, particularly if they expressed the particular purpose of additional clauses. The court might look at how reasonable parties have been in dealing with each other, taking account of all the relevant circumstances applying in each case.

Given that there is a paucity of case law in respect of these issues in relation to the current pandemic the precise approach which a court might take is not clear and legal advisers should give careful consideration as to how business relationships and negotiations should be managed whilst COVID 19 continues to impact upon contractual dealings.

Jeremy Berg
Partner - Dispute Resolution
Jeremy Berg is a Partner Solicitor at Spencer West. He specialises in Commercial and banking disputes, (including international claims), employment, media and reputation management.