There is good and bad news. Whether the news is good or bad depends on whether you are the beneficiary under the contract (that is, benefit from someone owing an obligation under the contract to you) or whether you are the person who owes the obligations to the other party. It will also largely depend on the terms of the contract which you accepted when entering into it. And it will depend on whether the pandemic (and the laws that have been passed to deal with it) have made it impossible for the contract to be performed, or have made performance of the contract radically different from what was originally undertaken.
Why is English law used in international commercial transactions?
English law is chosen for international commercial transactions for many reasons. These include its flexibility given its commitment to freedom of contract, stability and predictability, the absence of uncertainty that may be caused by the application of general duties of good faith to commercial dealings, an experienced expert judiciary and an efficient system of courts. However, another reason why English law is chosen is the certainty that English law contracts can give in times of uncertainty and turmoil. The doctrine of contractual strict liability makes English law-governed contracts an effective risk-management tool in international commercial transactions. But it is a double-edged sword. While it can be a blessing for the party to whom an obligation is owed (such as a creditor); it can be harsh on the person who owes the obligation. Those who are bound by English law governed contracts often assume a greater risk of changes in circumstances than those bound by contracts governed by continental legal systems. Within the English legal and commercial tradition, it is for the parties to bargain to address the negative aspects of strict liability in their contracts (for example by negotiating for the inclusion of force majeure clauses or obligations to use best or reasonable endeavours to do something rather than absolute obligations to bring about a result). Freedom of contract facilitates all this. For these reasons, negotiations of English law contracts can be tough and drawn out; but fundamentally, the parties are then bound by the plain meaning of the contractual terms that they have agreed, unless the doctrine of frustration operates.
Meaning of ‘strict liability’ in contract
According to the doctrine of strict liability, a party will be bound to perform exactly what it promised and will only be released from its contractual obligation in extremely limited circumstances. The reasons for non-performance do not generally provide an excuse. It is usually irrelevant to liability for breach of contract that the party was not at fault or had done its very best in the circumstances to perform. It is irrelevant that performance became more costly or difficult due to some external event beyond the party's control. There is no implied doctrine of force majeure, hardship or changes in circumstances that provides a defence. If it is at all possible to perform, the relevant party must so.
Frustration: an exception to contractual strict liability
This otherwise uncompromising approach is softened to a limited extent by the doctrine of frustration. Frustration occurs where a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. This requires that performance of the contract, or the achievement of a common purpose behind the contract, must have become impossible or become radically different from what was originally promised. A change in the law making performance illegal will also discharge a contract. The change must make performance of the contract impossible, not just more difficult or costly. Finally, for the doctrine of frustration to operate, the risk must be one which was not expressly or impliedly allocated by the terms of the contract.
If the doctrine of frustration operates, it leads to a drastic outcome. The entire contract is automatically terminated. All rights and obligations are permanently cancelled. It does not operate partially and does not merely suspend performance. The parties' positions can then be readjusted under the law of unjust enrichment or according to special legislation (dating back to World War II) that deals with the consequences of frustration.
Interestingly there seem to be no reported court decisions where this doctrine was sought to be applied in the context of the last pandemic, the Spanish Flu of 1918-20. Undoubtedly, the English courts will soon have to consider its application in the context of the current Covid-19 pandemic. The doctrine of frustration may operate in some cases in the current situation; but the outcome in every unique case will depend on the wording, context and common purpose of the relevant contract must do so.
Freedom of contract and risk allocation
English contract law places the onus squarely on the contracting parties to provide for supervening events and changes of circumstances expressly in their contracts. The parties are encouraged to spend time and money on negotiating and documenting their contracts; if savings are made here and corners cut, then greater costs are likely to be incurred when a dispute actually develops. For English law-governed contracts, the doctrine of strict liability provides one of the main reasons why an investment in getting the contract right at the outset is a wise investment. Each party should ensure that its obligations are clearly described and qualified, ideally by experienced solicitors familiar with the linguistic and legal nuances of the English terms that are used.
The Covid-19 pandemic is likely to result in many disputes as to who ultimately must bear the losses that it brings about. For English law contracts, the reasons for non-performance will be irrelevant, unless the reason is something so extreme that the doctrine of frustration is invoked. Frustration requires a very high threshold to be met, so the beneficiaries of English law governed contracts are likely to be in a better position than beneficiaries of contracts governed by other legal systems. Those owing the obligations may be in a worse position than if the contract had been governed by another system of law.
What lessons can be drawn from all this? First, contractual strict liability is one of the advantages of using English law contracts. A party to an English law governed contract will have to honour its promises irrespective of changes in circumstances, unless the doctrine of frustration operates. Consequently English law governed contracts are a very powerful tool for allocating risk. This can be said to make English law governed contracts, or more accurately their underlying allocation of risks, more ‘certain’. But, secondly, each of the parties must bargain for the inclusion of express provisions in the contract to mitigate strict liability (such as force majeure or hardship clauses) or risk being caught out by changes in circumstances. Of course, what is actually appropriate and achievable in this regard in a given transaction will depend on the relative bargaining strength of the parties and the nature and conventions of the market in which they operate. Finally, differing approaches to strict liability among different legal systems are just one of the reasons (alongside differences in the availability of various types of remedies, court procedures, rules of evidence, and approaches to contractual interpretation and the implication of terms) why changing the governing law of a contract to a different system will result in a quite different contract. It creates a different allocation of risks between the parties, particularly when the circumstances in which the contract must be performed significantly change as has happened now with Covid-19.