Talent Management & HR

Does coronavirus allow you to break your contract?

Countless people – from international footballers and NBA stars to nannies and babysitters – have been unable to fulfil their contracts because of the coronavirus.

The question is this: could all these people be sued for breach of contract, or are they excused because this is such an extraordinary event? What about payments made in advance, such as parent’s payments to schools for a term’s-worth of bus transport, tickets bought for a concert that has now been cancelled or a dormitary room leased at a college that is now closed?

Wars, floods and other pandemics have undermined innumerable contracts over the years. In response, courts internationally have established a fairly clear set of legal rules to answer these questions.

The rules of impossibility and restitution

A promise given in exchange for money becomes an enforceable contract, and it remains enforceable even if living up to its terms turns out to be more challenging than expected.

If a babysitter promises to look after your children once a week for AED250, she is bound to the contract regardless of car-lift trouble, the kids misbehaving or other hardships. If the babysitter gives up, that is a breach of contract and she is legally liable to you. This is what makes a contract a contract and not an idle promise to give it a try.

But what if the babysitter failed to show up because a coronavirus outbreak made it physically dangerous for her to enter your house or because the government issued an order to remain home to avoid spreading the virus?

Because this type of extraordinary and unanticipated event, often called an “act of God,” is so radically different from the ordinary risks and challenges of babysitting, and because it makes her performance so much more difficult and dangerous than expected, the courts will excuse her from the contract. Through no fault of her own, her performance has become effectively impossible, and so her failure to babysit does not count as a breach of contract.

That is not the end of the story, though. Under the legal doctrine of restitution, which prohibits unjust enrichment at the expense of another, the babysitter would have to return any money you paid her in advance. She has not breached the contract, but neither has she fulfilled it, so it would be unjust for her to keep that money.

This basic framework – impossibility and restitution – applies generally to contracts that have been upended by the coronavirus pandemic and government orders to combat the virus’s spread.

It does not apply to every expense, however.

If you bought an AED450 ticket for a Lady Gaga concert and the event has been canceled, there is no breach of contract, although Lady Gaga would have to refund your AED450 as a matter of restitution. But if you and your friend bought nonrefundable AED20 metro tickets to travel to the concert, Lady Gaga is not liable for that loss. Since that money was never paid to Lady Gaga, she can’t be held responsible for it.

Force majeure: The escape clause

In some cases, an escape clause is written into the contract specifically for situations like this. It’s called “force majeure,” which translates to “superior force” and is often referred to as the “act of God” clause.

Force majeure clauses are common in corporate contracts. They dictate which types of unexpected events will excuse performance and how to deal with payments already made or other losses. The precise wording of these clauses is key. Some might expressly mention pandemics or government orders, while others might not. Similarly, some clauses might call for full restitution, while others might provide for 50% refunds or no refund at all. Whatever the force majeure clause says will displace the ordinary rules of impossibility and restitution.

The contract between the NBA and its players, for example, includes a force majeure clause that specifically covers epidemics. It states that basketball teams can withhold part of their players’ salaries for each canceled game, and ESPN reported that the league was considering it.

Many Indian university students who have been evicted from their halls of residence are also bound to a force majeure clause that specifies no refunds if the dormitaries are closed in the event of an emergency. This overrides the general rule of restitution.

All that said, parties to a contract are always free to waive their rights under a force majeure clause and provide refunds anyway. 

When it gets more complicated…

Currently, about 60% of the cases being handled by the Bahrain Chamber for Dispute Resolution relate to oil tankers stranded in the Arabian Gulf due to the international embargo on oil exports from Iran. They were loaded with oil (in some cases, many years ago) and were then trapped, unable either to travel with it on board, or unload it to the original buyer. The first recourse has generally been to claim on the shipping insurance policy, but this in most cases classifies embargo as coming under the category of force majeure. 

Similarly, attempting to sue the buyer for reneging on the contract meets a similar problem – the buyer claims the contract is null and void because of the embargo being a case of force majeure. As a next step, the shipping owners have in many cases found lawyers who argue that embargo is not in effect a force majeure, since it is a purely arbitrary, political decision, not an ‘act of God’. So, their cases go on, month by month, year after year.

Similarly, as the coronavirus situation matures, it is likely that for both individuals and corporates, we will see many more equally subtle interpretations and rebuttals of what actually constitutes a true force majeure – and the level to which there was genuine risk or actions that were in fact taken as part of an arbitrary risk reduction strategy.

 

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