What are the legal implications if you can’t fulfil a contract

Where do you stand legally if you have outstanding contracts that you cannot fulfil through no fault of your own, or have contracts with others for the supply of goods or services which they cannot fulfil?

We asked Amanda Hamilton, Chief Executive of the NALP to outline the legal implications.

Any business, whether small, medium or large will be experiencing the most difficult time, in the current situation, not only financially but in other ways as well.

This may mean ensuring that your employees are safe and well looked after, and having to pay a percentage of their salaries even if they cannot work, and your business may not be currently bringing in an income.

Owning a small business, means that you may not have the resource to bring an action against a contractor, nor would you have the finances to defend yourself should someone, with whom you have a contract, decide to take a hard line and sue you for breach of contract.

What is in the contract?

Legal liability depends on the contract you have with your client/contractor.

While all contracts have to be valid and legally binding, they do not have to be in writing. Many contracts we make over a course of one day, will not be documented or have signatures to them.

For example, if we take public transport to and from work, we don’t sign a contract every time we step onto a bus! However, once we have paid with our card, the bus company will be contractually bound to take us safely to our destination within a reasonable time. If there is an accident, or if our arrival is seriously delayed, we may have a course of action for compensation.

So, if you have a small business which supplies a certain amount of goods/items to another and there is no written contract in place, then if a dispute arises, it will be for the court to decide whether there was indeed a legally binding contract, which may well be based on a series of actions over a period of time.

The court will also take into account certain other evidence to construe whether there was a valid contract. Hopefully, any dispute in this current climate will not get that far, since everyone is in the same boat.

Verbal contracts aside, if there is no dispute that a contract was valid and there is a breach e.g. one party has not fulfilled their part of the contract, then whether there are any legal consequences will depend very much on the contract itself and clauses within it.

Unforeseen circumstances

What would be the legal consequence if there is a valid contract which cannot be fulfilled because of some outside influence that is unforeseen, such as the situation we currently find ourselves in, in which changes to our everyday routines are not chosen (for safety reasons) but are being forced upon us through no fault of either party to the contract?

If a car manufacturer is contractually bound to distribute a certain number of vehicles to a retailer but who cannot fulfil this because his factory workers cannot go to work as they are self-isolating, and this is a Government Directive that neither party foresaw at the time of making the contract.

Can the retailer sue the manufacturer for compensation? The answer is, probably not as the contract will be deemed to have been frustrated.

Frustration is a doctrine in English Contract Law and is defined as an unforeseen event that renders the contractual obligations impossible to perform thereby relieving the parties of their legal obligations. It excuses non-performance and automatically discharges (terminates) the contract.

The only exception to this is where the circumstances may have been foreseeable and therefore avoided, and it is not applicable to certain contracts such as insurance policies.

Force majeure

Sometimes there may be a clause in a contract which relieves the contractual liability of either party in circumstances where certain events or situations may arise.

These clauses, known as ‘force majeure’ clauses, tend to specifically identify what kind of events, such as ‘acts of god’ e.g. weather related occurrences, or acts of war. On occasion, this may also include compliance with government directives.

If you are concerned about being unable to fulfil a contract you may have with a supplier, or one in which you are the supplier, the first thing to check is the clauses of the contract. Then, check whether your supplier is able to supply the good or items. If they cannot because of the Covid-19 situation, then the contract may well have been frustrated. The same may apply to your situation.

The likelihood is that if you are concerned, then your supplier/client is in the same situation, so contact them and agree with them if you can, what would be the best course of action to take.

If you find yourself in difficulty, not knowing what to do for the best, a paralegal may assist you if you cannot afford the fees of a solicitor or barrister. A paralegal can also act as a mediator if you need an independent third party to negotiate between supplier and client.

This article has been written for ByteStart by Amanda Hamilton, Chief Executive of the National Association of Licenced Paralegals (NALP), a non-profit Membership Body and the only Paralegal body that is recognised as an awarding organisation by Ofqual (the regulator of qualifications in England).