The lockdown has posed inordinate challenges for education – with schools and universities adjusting to remote learning on extremely short notice. For private schools and universities, there have been tough choices between furloughing staff, deciding which lessons and courses to continue and justifying the level of fees, when many parents are in financial difficulty themselves. Boarding schools and universities have additional problems as they have a high level of sunk costs in infrastructure for overseas students that, at present, are not allowed to travel.
Most contracts have force majeure clauses which, aided by the WHO classification, recognise Covid-19 as a pandemic. Most of these clauses have been inserted as boiler plate clauses to deal with one-off events like war and terrorism that no one really expects will ever be triggered. Suddenly, everyone is dusting off Treitel and recalling their law school cases on frustration and Acts of God.
How do these apply to Covid-19? Frustration is where the contractual obligations are no longer capable of being performed because an event changes the fundamental nature of the bargain struck between the parties so that it would be unjust to hold them to it. Force majeure entitles either party to justify their non-performance of their contractual obligations due to an event that is beyond their control. These remedies are not easily available. A recent example is Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch), where it was held that Brexit did not make the EMA’s continued occupation of its London headquarters impossible so they remained bound by the contract.
For force majeure, the burden rests on the party seeking to excuse their performance to prove that, as a result of the event, they are prevented (i.e. it is physically or legally impossible for them to carry out their obligations) or hindered (i.e. that service delivery is “more difficult, but not impossible”). They also need to show that they cannot mitigate the loss by finding an alternative means of performance.
This cuts both ways:
- Parents that have lost their jobs may want to withdraw their children from school and avoid paying a term’s fees in advance or giving the requisite notice period; alternatively they may want to continue their child’s education and preserve their child’s place for the return after lockdown;
- Schools recognise that they cannot provide the full curriculum or boarding provision but want to provide continuity in core education and maximise contributions to fixed costs. Similarly, universities want to continue their courses and attract/maintain students for the next year but recognise that they cannot provide the full range of facilities
The standard remedy for force majeure and frustration is cancellation of the contract but that outcome may not be what either party needs or wants. Most contracts provide notice provisions, where either party can notify the other if they cannot perform their side of the contract any longer due to unforeseen circumstances. Some contracts may provide for an escalation procedure or cooperation provisions to manage the process. Others are silent.
The Cabinet Office has published Guidance, which encourages responsible and fair performance and enforcement of contracts during the COVID-19 emergency. It advises that parties are “reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of co-operation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest”. Examples where parties can relax rules in good faith, include demanding payments, granting extensions, relief for impaired performance (including the nature and scope of services provided), using ADR and mediation where appropriate
How can counterparties effectively manage this uncertain situation when neither of them may wish to call time?
- Parents/students should notify the school or university provider if they are concerned about their ability to pay fees and seek to negotiate a reduction or staggered payments over time. That will need to be evidence-based on ability to pay rather outright refusal to pay to ensure fair and equal treatment. The important thing is not to panic and cancel your place when schools may resume in July or September as you may still end up having to pay a term’s notice. Many schools have set up hardship funds to assist parents that have been furloughed or are self-employed. You may want to add in a regular update and review, should the pandemic and job insecurity continue after 6 months or a year.
- Most schools have notified parents that they can no longer perform the full-range of services as envisaged in the contract. This is not a breach of contract but they are fulfilling their obligation to carry out their side of the bargain to the best of their ability. The transition to online learning has been an impressive example of alternative mitigating means. Whilst some aspects (such as science experiments and practical art or boarding facilities/after school clubs) are not possible, schools have offered fee reductions of between 5-25% to reflect the lower standard of services provided.
Some parents have raised objections as they consider the fee reductions offered by their school/university are not sufficient when compared to the cut-back in facilities and extra-curricular activities or are lower than those offered by other schools. Two providers (even within the same locality) may not be comparable as they may have different levels of fixed sunk costs, different access to funding and endowments and have made different choices regarding which subjects, courses, clubs to continue. Putting pressure on schools and universities may be counterproductive as waiving a significant proportion of their fees could squeeze the cash flow leading to cost cutting, teachers losing their jobs and cut backs on future investment plans resulting in inferior services when they do eventually resume.
For schools, it is imperative that any decisions regarding prices are taken in complete independence without any direct or indirect contacts with other schools, through associations or charitable foundations. In 2006, 50 independent schools were found to have taken part in price-fixing by exchanging pricing information and were fined over £10,000 each and required to pay £3m into a trust fund. The CMA has recently sent a warning letter to private schools not to share pricing information or coordinate discounts in response to Covd-19.
However, it is important that providers do not overreact and reject opportunities for legitimate cooperation that might assist them in these troubled times. The European Commission has announced a “Temporary Framework” and the CMA has issued Competition Act 1998 Guidance, offering an exemption from competition law, for essential cooperation between competitors regarding production, distribution and logistics. For example, the European Commission has just issued a comfort letter to pharmaceutical companies for the production of intensive care medicines. Those measures will not, of course, offer protection for price fixing or market sharing, but could conceivably allow different private schools or universities to share remote learning content, allocate production of webinars or online lesson plans in certain subjects between themselves, enter into joint purchasing, distribution or logistical arrangements. The schools will need to show that such temporary arrangements generate efficiencies and cost savings and do not go beyond what is necessary to achieve those benefits for students and parents. It would also be advisable for any educational providers taking part in such arrangements to set up appropriate checks and controls to prevent any confidential information being circulated within the group of participants.