The outbreak of coronavirus (COVID-19) has brought about sudden changes to society with regulations forcing the closure of many business and restricting the ability to travel. Where these restrictions make a contract impossible to perform, it may be frustrated.
Where a contract is frustrated, by default the Law Reform (Frustrated Contracts) Act 1943 applies. This contains a statutory entitlement to a refund of any payments made less a deduction of reasonable costs incurred before the frustrating event (i.e. the date of the lockdown).
The 1943 Act only applies if alternative contractual arrangements have not been made (e.g. through terms and conditions). Therefore, if the contract has specific terms that address the frustrating event, sometimes referred to as a ‘force majeure’ clause, these apply.
In a consumer contract, a force majeure clause is only applicable if it is a fair term (e.g. that is does not significantly imbalance the rights and obligations of the parties). In a business to business contract force majeures have automatic effect regardless of the perceived fairness.
In the first instance, the best advice is for the parties to communicate. There have been many examples of customers and businesses working constructively together to avoid the need to cancel contracts completely by securing some other arrangement. These arrangements are voluntary but with the agreement of both parties can maintain the contract, which in turn helps those businesses that are struggling due to the financial impact of the current situation.
Injured parties may pursue failure to comply with these legal provisions through the county court.
Practical steps to resolving a contract cancellation issue:
- Communicate with your client. Nothing in the legal provisions prevents contracting parties coming to alternative arrangements (i.e. a rearranged date for competition). Remember, these are voluntary arrangements and must be agreed by both parties.
- For consumers, if the contract was over £100 and you paid (or part paid) by credit card, you may be able claim through your credit card company. Contact your provider to register a claim.
- Check your terms and conditions. If they cover the situation, i.e. a ‘force majeure’ clause (major unforeseen events outside of either party’s control), these terms will apply to all business to business contracts. They will only apply to consumer contacts if the term is fair (does not significantly imbalance the rights and obligations of the parties).
- If your terms and conditions do not cover the situation, consumers will be entitled to a refund (less reasonable costs incurred prior to the frustrating event) by the Law Reform (Frustrated Contracts) Act 1943.
- The Government is providing financial support to businesses to reflect the impact that such obligations will have and advice and support on applying for this financial assistance can be obtained via your local council business rates team.
The Competition & Markets Authority (CMA) has also published this guidance:
- CMA to investigate concerns about cancellation policies.
- The coronavirus (COVID-19) pandemic, consumer contracts, cancellation and refunds.
If you are a consumer and need further advice or information about a cancelled contract due to Covid-19, contact the Citizens Advice consumer helpline on 0808 223 1133.
For business resilience support and guidance about coronavirus, visit the Heart of the South West Growth Hub COVID-19 support for business.