Covid-19 and contracts made before it

An estate agent employs a salesperson in February 2020, under an open-ended contract which has a “probationary” clause in it, permitting the employer to dismiss the employee after 3 months if he does not perform to the employer’s satisfaction.

In this industry, a significant part of the employee’s compensation is made up of sales commissions to incentivise performance. The written terms of the contract provide, inter alia, that the employee will receive 20% of all commissions he brings into the firm, which are the result of sales in which he was the primary salesperson.  Commissions are paid quarterly, and so the next payment to him will be in April 2020, in respect of commission earned during the period January to March. To reflect the fact that the salesperson joined part-way through the commission cycle, the employer agrees to impute sales of £50,000 attributable to the employee. Accordingly, the employee will have a minimum of £50,000 in sales by end-March, and a bonus of £10,000, although both parties expect that bonus to be substantially higher, supported by estimates made by the employee at the interview stage.

The employee does not make a single sale before Covid-19 arrives in the UK in late February, and the number of property market transactions collapses to almost zero. The restrictions in relation to contact with other persons, placed upon the workforce by the government, means that it is almost certain that no further sales will be made or attributed to the employee during this commission cycle. Further, the employer sees no prospect of an upturn in the market, and takes such a bearish view of the short-and medium-term property market that he elects to make large numbers of his staff redundant.

Under the terms of the employment contract, the employer may dismiss the employee if his performance by the end of the probationary period merited it, and so contractually, in this respect, the employer is entitled to do so. But what of the commission payment?

The employee is owed £10,000. The employer claims that the arrival and effect of Covid-19 was that the contract did not turn out in the manner that either party expected, and indeed, the reason for that was both unforeseen and unforeseeable. He refused to pay the £10,000 on the grounds of either (1) Force Majeure, or (2) frustration.

  • A “Force Majeure” clause allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
  • “Frustration” is the term given to the circumstances in which an event occurs after the contract has been formed, which makes the contract impossible to perform, or makes performance radically different.

The courts generally favour the certainty of contractual provisions over an attempt to avoid complying with those obligations. It is often reluctant to set those contractual provisions aside unless there are compelling reasons to do so. Consequently, an attempt by the employer to avoid complying with those provisions faces high hurdles to overcome. Both of the above are governed by principles derived from a substantial amount of case law.

By virtue of the fact that the current circumstances of Covid-19 are unprecedented in the memory of most people indicates that it is a very rare event. It is possible that a court would decide that the virus and its effects made the contract radically different from that envisaged by the parties, and so it was not capable of being fulfilled in that manner.  If it did decide that, the £10,000 would not be payable. If it considered that the virus was similar effect to previous pandemics such as SARs or MERS, and was therefore not unusual and indeed, was foreseeable, the contract would be binding and payment of the £10,000 would be required.

 

The coronavirus is throwing up many unanticipated events, many of which are complex. If you require advice on any aspect of employment law or related issues, including the above, please contact Chris Marshall (cmarshall@meaby.co.uk) on 0207 703 5034.