COVID-19, contracts, and the law of illegality

We have set out in other updates how COVID-19 could mean that a contractual performance is impossible (giving rise to questions of force majeure or frustration), but what if the current circumstances render performance under the contract not just impossible, but illegal?

The Coronavirus Regulations

The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (the Regulations) came into force on 26 March 2020. In recent days there has been some confusion as to the effect of these Regulations: some people aren’t sure in what circumstances they can leave their house without being stopped by police, and some police don’t know in what circumstances they can stop people. These are the inevitable consequences of emergency laws, rushed through without parliamentary scrutiny.

One thing is clear though: the Regulations constitute a significant restriction to how we lead our lives and conduct our business. In the context of contractual arrangements, some activities that were once routine and fundamental to performance may now be outlawed.

So, having just reminded ourselves of the law of force majeure and frustration, do we now need also to consider the law relating to illegality, something that one judge described as “notoriously knotty territory”.

Thankfully not. If performance of a contract is now rendered impossible because to do so would be illegal, that is the territory of frustration.

However, that said, parties should think carefully about drafting any contracts at the moment that may require performance involving something that is currently outlawed under the Regulations. This is precisely where the law regarding illegality might come into play.

The law of illegality

Briefly, a contract can be illegal as to formation or as to performance. It is illegal as to formation if it cannot be performed without the commission of an illegal act. It is illegal as to performance if one or more of the parties intend to perform the contract in an illegal manner.

It is not difficult to imagine how “knotty” questions might arise in the context of COVID-19 and the Regulations. Suppose you enter into a contract to put on a festival, or contract with an actor to take part in a play. Clearly, were the play or festival to take place in the next couple of weeks, that would be a contravention of the Regulations, particular Regulation 7’s restrictions on gatherings. But what about if the play were in 4 months’ time?

Of course, we all hope that these restrictions will not be around for such a long time. But, the law is written such that they apply for the “emergency period” which began on 26 March and ends when the Health Secretary, Matt Hancock, decides. Although he is obliged to review restrictions under the Regulations every 21 days (with the first review being on the 16 April), the maximum period that they could continue in force, assuming they get parliamentary approval within 28 days of their taking effect, is six months.

So, without the Health Secretary’s lifting or altering the restrictions under the Regulations, or the Regulations themselves being amended, putting on that festival or play in 4 months’ time would continue to be illegal.

The consequences of this for the underlying contract between the parties are potentially stark: the contract could be held to be illegal at formation and, although not necessarily be rendered void (and therefore never to have had any legal effect), it will be unenforceable by either of the parties.

So, what does this mean?

Again, the restrictions contained in the Regulations will be continually reviewed by the Health Secretary, and the Regulations themselves must be approved by Parliament within 28 days of their taking effect. We all would hope that restrictions are lifted or the Regulations amended in short order. But, it is not impossible to imagine that this is the new normal, at least for the short term.

What this means for contracts which are currently being negotiated and contemplate performance in the short term is that it would be sensible to refer explicitly, for example in the recitals or as a condition precedent, to the Regulations and recognise that the contract will only have effect so long as there are not restrictions in place that forbid performance.