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Coronavirus: Performing Under Pressure

March 2020 Jonathon Milne

During these difficult times, as the COVID-19 outbreak continues to disrupt our daily lives, health and safety is paramount. However, as travel bans are implemented, quarantines are enforced and restrictions are placed on the flow of goods, the global supply chain and commerce in general will be put under immense pressure.  The unprecedented measures many governments are taking to ‘flatten the curve’ and protect the human population will have a flow-on effect for business and raise a number of legal issues.

The Cayman Islands have had to deal with extreme events in the past (e.g. Hurricane Ivan in 2004), which often have repercussions that were not contemplated by contractual counter-parties at the time their agreements were entered into. Hurricane Ivan and the novel coronavirus are prime examples of exceptional events which may prevent the performance of obligations. In this article, we consider remedies available in Cayman in circumstances where parties may be unable to perform their contractual obligations. In particular, we focus on the common law doctrine of frustration and the enforceability of force majeure clauses.

Frustration

In common law jurisdictions, such as Cayman, the doctrine of frustration is designed to deal with situations where parties to a contract are incapable of performing one or more obligations under that contract. In order to invoke frustration, non-performance must be linked to an unforeseen event and must not arise out of the failings of either party. In such circumstances, the contract may be deemed ‘frustrated’ and terminated with immediate effect.

In deciding whether or not to cancel a contract in light of the COVID-19 outbreak, the Cayman courts will analyse the primary purpose of the contract. If the principal mission and object can still be achieved, the court is unlikely to allow parties to rely upon the doctrine of frustration and be absolved of their obligations. It is unsurprising that the Cayman courts are reluctant to forcibly terminate an agreement. Cayman is of course a world-leading financial services hub and, in recent times, the Cayman courts have observed that freedom of contract is critically-important and have held that sophisticated parties must be allowed to negotiate and agree their own terms of business (see, for example, recent Privy Council decisions in Fairfield Sentry v. Migani and Primeo v. Pearson).

Whether or not the doctrine is engaged will depend on the terms and underlying purpose of the relevant contract. As governments impose restrictions on the movement of people and goods and workplaces are shut down for indefinite periods, parties need to consider with their legal advisors whether contracts have been frustrated by the coronavirus itself and/or other related external factors beyond their control.

 

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Jonathon Milne
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