Commercial Contracts and COVID-19

The recent government announcement on the 16th of April that the lockdown due to Coronavirus will extend at least for a further 3 weeks continues to challenge all businesses in an unprecedented manner. Indeed, the lockdown may still go beyond that period and the issues arising will undoubtedly extend beyond the short term.

In this article we, therefore, look at the issue of contracts- those agreements between two business parties- that are such a vital part of all commerce.

It is often said that the sign of a healthy business arrangement between partners is that contracts, once signed, should remain firmly locked in the filing cupboard and not referred to again. Sadly, in the current circumstances, and as evidenced in the media on a daily basis, contracts are currently being closely examined by all parties.
Consequently, it is critical that businesses are appraised of legal rights and obligations in their commercial contracts.

We shall look below at some of the more important points that potentially may come up, but please note that this is not an exhaustive list and there is no substitute for taking legal advice tailored to the particular facts and circumstances at play for the business contract in question.

Force Majeure

In English Law, force majeure can only be used to seek to discharge a contract if there is an express provision within the contract.

Normally a force majeure clause will set out that, where a certain event takes place which is beyond the control of both of the parties, each party will be entitled either to discharge the contract and be excused from performance or alternatively each party can suspend and extend the time for performance.

If there is nothing expressed in the contract, no term will be implied in it. Equally, the precise wording of the term is vital to establishing whether the clause will apply to an event, and what constitutes a force majeure.

A party seeking to rely on a force majeure clause will often be required to prove that the impact of the event has prohibited, or has been a severe impediment to, their ability to perform under the contract. In those circumstances, parties will need to take into account whether performance has been prevented, or just simply made costlier, which in itself may not be sufficient to discharge the contract.

If the contract involves a jurisdiction other than England and Wales, the treatment of force majeure can be different. For example, some civil law jurisdictions have detailed statutory rules on force majeure.

Frustration

In the event that a contract does not include an express force majeure clause, a party may be able to discharge the contract using the Doctrine of Frustration.

A contract may be frustrated by the Coronavirus pandemic where it becomes impossible to perform, or where, as a consequence of Coronavirus, a party’s contractual obligations become radically different to what was envisaged at the outset. If a contract is frustrated, the contract will immediately be terminated, and both parties released from performance. As a note of caution, do keep in mind that this does not release the parties from liability up to that point.

Other considerations for each contract

For each contract, you need to understand what termination rights are and whether they favour you or other contracting parties. These can vary a good deal from contract to contract, so, again, it will be crucial to review the terms of each agreement carefully. If you are looking to make use of such termination rights, you must make sure you adhere exactly to the notice provisions in the contract.

As part of your analysis, you should consider your risk exposure, in particular, if you are unable to perform the contract. In that regard, there may be clauses in the contract which make liability subject to an overall cap and these provisions may also exclude certain types of losses.

Where there are parties from outside England and Wales, it is also important to take into account the governing law applicable to the relevant contract. If the relevant contract is governed by the laws of a country other than England and Wales, you will need to take advice from a lawyer qualified in the relevant jurisdiction and be aware at the outset that it is possible provisions in the contract will be unenforceable in the UK. In addition, you should check the contract to see which courts have jurisdiction over disputes, since enforcing a contractual provision abroad may be far from straightforward. There may also be arbitration clauses, or other clauses specifying how any dispute is dealt with, which may for example require the parties to seek to mediate a dispute before they can escalate the dispute to the courts.

What else does a contracting party need to consider in relation to Coronavirus?

Regardless of the legal jurisdiction, there are invariably certain practical steps you can take and the actions will often depend if you are the “innocent party” or the party potentially in breach.

You will need to consider the facts to establish whether there is a claim or defence (as the case may be) and for this purpose it is critical to keep appropriate records of what has happened and of any discussions with the other parties.

You should consider whether any preventative measures can be taken, such as stockpiling or early delivery, and whether solutions can be negotiated with the possibility of the parties agreeing to a variation to the contract.

Any party should also consider insurance coverage and whether any notifications are required under the relevant insurance policies.
We also naturally recommend taking specialist legal advice to protect your position at the earliest possible juncture.

Summary

The broad issue of contracts is always challenging; however, they reflect the fact that two parties wish to formalise an agreement and therefore are generally borne out of significant goodwill. We believe that whilst Coronavirus places a significant strain on all business relationships, that goodwill should still be at the heart of discussions about contracts. In the great majority of cases, both parties will wish to work with each other going forward. We are of course always willing to offer specialist legal advice to protect your position, both with regard to existing contracts and the formulation of new ones as we move to a new trading landscape.

If you would wish to discuss any aspects of the above or any other matters of commercial contracts, please contact James Macdonald on 020 8891 6141 or via j.macdonald@srb.co.uk

James Macdonald

EU Citizens Living In The UK Post Brexit

The recent EU referendum result has led to a great deal of uncertainty in many areas of the law, and family is no exception. Although the exact ramifications are yet to emerge, it is likely the prospect of withdrawal from the European Union will have a significant impact on some areas of the law, such as jurisdictional rules for divorce proceedings; spousal maintenance; and child abduction, to name but a few.

So far, post Brexit, nothing has changed. The laws which applied before the referendum still apply today, and it’s worth remembering that it will be at least two years before the United Kingdom formally leaves the European Union.

Here is an overview, commissioned by Resolution (the family law organisation) that outlines the key steps people need to take now in order to give themselves as much protection as possible if the rules do change.

Brexit – What EU citizens living in the UK need to know

The vote in favour of the UK leaving the European Union, has thrown up a lot of unanswered questions about the UK’s future and the position of Europeans living in post-referendum Britain.
Below we have set out some answers to the questions people may be asking about their position now and in the months and years to come.

Have you lost your right to live in the UK?

No. The outcome of the referendum in and of itself changes nothing about the existing free movement rights which European nationals have. The referendum is not itself binding and will require further steps in order for us to begin the process of extricating ourselves from the EU. If and when the British Government decides to begin the process of leaving the EU, they will need to invoke Article 50 of Treaty on the European Union. This will trigger a two year period during which the terms of our departure will be negotiated.

 Article 50 has not yet been triggered, and it is unclear as to when this will happen. Unless and until we leave the EU, members of the EU should be able to continue to travel to and live and work in the UK under the same terms we currently have in place.

What will happen once the UK has left?

If the UK does leave the EU, the impact of our departure on EU citizens will depend on the outcome of negotiations.
We expect that transitional arrangements will be made for EU citizens in the UK at the time of departure from the EU. While we don’t yet know what those transitional arrangements would be, it is highly likely that EU nationals who have spent five years in the UK already and who have acquired permanent residence would be able to remain under similar terms. We would expect transitional arrangements to also address the position of EU migrants who have not yet acquired permanent residence but are resident in the UK. Although we do not yet know what options would be open to them, we don’t expect that they would be forced to leave the UK.
 
Although the campaign to leave the EU was often argued on the basis of ending EU Free Movement, prominent Leave campaigners have admitted following the outcome of the referendum that it is likely that Free Movement in some form could continue following a decision to leave. However, until any such agreement is made, we do not know what the position will be for EU nationals wishing to travel to the UK to live in the future. It is, however, very likely that travel between the UK and Europe for visitors will remain visa-free regardless of any decision on Free Movement.

What should you do now?

If you want to protect your position in case the rules do change, you should consider the following steps:

• Obtain a national ID card where possible

Applications for documentation from the Home Office confirming EU Free Movement rights require submission of an original EEA passport or ID card. While it is possible to request these documents back within 4-6 weeks of an application being submitted, this can impact on the ability of EEA nationals to travel during this time and if there is a rush of applications the processing time for return of passports could become longer. Therefore, where an EEA state offers the option of a national ID card as well as a passport, it is advisable to obtain this first so the passport can be retained for any travel during this initial application submission period.

• Collect documents

The most important step is to collect original evidence of your residence and status in the UK (employed, self-employed, student or self-sufficient) covering all the time you have spent in the UK – for instance, payslips, P60s, employment contracts, bank statements, council tax statements, utility bills and proof of accommodation.

• Obtain private medical insurance if you are not working

You should obtain clear proof of comprehensive private medical insurance for any periods in the past when you were not employed or self-employed, and for any periods when you stop working in future – for example if you study, take a break between jobs or leave employment to set up a business.

• Register as a jobseeker if you lose your job

If you are made redundant or become involuntarily unemployed you should register as a jobseeker with JobcentrePlus. If you have been working for at least one year, are made redundant and register as a jobseeker you can maintain your status as a worker and count any such period of unemployment towards acquiring permanent residence. If you do not register as a Jobseeker you will need to have comprehensive private medical insurance in place before the date of termination of your employment.

• Keep a record of your absences from the UK

Put together a record of all your travel over the last six years, and keep a record of any future travel. Absences of more than six months in total in any year may prevent you from obtaining permanent residence after you have completed five years’ residence. There are some exemptions to this limit – for instance, if you are posted abroad for work for more than six months (but only up to a permitted one-off maximum of 12 months). You will need to obtain confirmation of the reason for the absence from your employer. If you are leaving a job, try to obtain this confirmation before you leave.

• Apply to the Home Office for proof of their status

Apply to the Home Office for a registration certificate or, if you have already been in the UK for five years, a document certifying permanent residence. These documents do not in themselves confer any rights but they could be used to show that the British government has acknowledged that you are exercising your right of residence or have acquired permanent residence.

• Apply for British citizenship

If you have been living in the UK for at least six years, consider applying to the Home Office for naturalisation as a British citizen. This can only be done after obtaining a document certifying permanent residence. Before applying, you should check whether your country of origin permits dual nationality and whether it will impact on your tax position. If you have any non-EU family members (eg. Spouses, dependant relatives), becoming British could impact on your ability to rely on your EU rights so take advice on this first also.

• Apply for British passports for children born in the UK

Consider applying to HM Passport Office for a British passport for your children born in the UK. A child born in the UK on or after 30 April 2006 to an EU citizen who acquired permanent residence before the child’s birth is automatically a British citizen, even if the EU citizen parent has never held a document certifying permanent residence. There are different rules for children born before 29 April 2006, and different rules again for children born before 2 October 2000. Children who were born in the UK but did not automatically become British at birth have an entitlement to register as British citizens if one of their parents acquires permanent residence. They can also be registered if they were born in the UK and have spent the first 10 years of their life in the UK.

If you are affected by any of the issues raised in this article, or would like to seek clarification on your specific circumstances, please call Lisa Broddle who heads Stone Rowe Brewer’s Family Law team on 020 8891 6141 or e-mail l.broddle@srb.co.uk

Why Your Company Should Have A Shareholders Agreement

A shareholders agreement is a contract between the shareholders of a company that determines how a company will be run. However, there is no legal requirement for the shareholders of a company to enter into a shareholders agreement. Without a shareholders agreement, a company will be run in accordance with its articles of association and general company law (under statute and case law). Why then should you bother with a shareholders agreement?

1. Bespoke clauses to fit your company’s needs

The majority of companies are set up using standard format articles of association which do not go into anywhere near the level of detail you can go into in a shareholders agreement. Bespoke clauses can be drafted to meet the specific needs of your company dealing with matters as varied as shareholder responsibilities, dividends policy, minority shareholder protection and share transfer procedure.

2. Shareholder Disputes

It is not uncommon for shareholders to disagree. Even in companies with a husband and wife as the only two shareholders, disputes may arise (in fact, perhaps it is even more common in this scenario!). A shareholders agreement can set out the method of resolving a dispute leading to a quicker and more effective resolution and often preventing the dispute in the first place.

3. Management of the Company

Generally, the board of directors are in charge of the day to day running of the company with statute requiring only certain decisions be made by the shareholders. Under a shareholders agreement the shareholders can regain further control over the company by requiring that the directors obtain shareholder consent for certain decisions. The restrictions on board decision making can be as strict or lenient as the shareholders require.

4. Privacy

A shareholders agreement is a private and confidential document between the shareholders. There is no requirement for a shareholders agreement to be made available to the public (unlike articles of association which must be made available at Companies House).

5. Death or Incapacity of a Shareholder

In the unfortunate event of the death of a shareholder, without a shareholders agreement, the deceased’s shares will likely pass through their estate to a spouse or family member. This incoming shareholder may not, for any number of reasons, be an ideal business partner for the surviving shareholders. Equally, the deceased shareholder may not have intended to burden their family member with membership to the company. A shareholders agreement can prevent this by providing an option for the surviving shareholders to purchase the shares from the deceased’s shares. A similar option can be implemented for when a shareholder loses capacity to act.

6. Minority Protection

As stated under paragraph 3 above (Management of the Company), a shareholders agreement can include provisions so that certain decisions can only be made with shareholder consent. This can be extended to protect minority shareholders by requiring that certain decisions can only be made with the unanimous consent of all the shareholders. Common examples of decisions requiring unanimous consent are changing the company name, amending the company’s articles of association, changing the registered office and issuing further shares.

7. Majority Protection

Circumstances may arise where a shareholder who owns the majority of the shares in a company wants to sell their interest to a third party buyer but as a minority shareholder does not want to sell their shares as well, the third party buyer withdraws from the transaction as he cannot acquire 100% of the company. This can be prevented by the addition of ‘drag along’ provisions in a shareholders agreement which provide that if the owner of a certain percentage of the shares in the company wishes to sell their shares to a third party then that majority owner may force the minority shareholders to also sell their shares to the third party.

8. Business Stability

A shareholders agreement can demonstrate the stability of the business which in turn can assist in raising corporate finance from banks or creditors.

If you would like further information, you can speak to a member of our staff on 020 8891 6141, or contact Jamie Jones or Paige Symns to discuss your shareholder agreement or other aspects of company formation.