Commercial Contracts and Coronavirus

The recent government announcement on the 16th 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 in 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 express in the contract, no term will be implied into 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 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, whist 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 dis cuss any aspects of the above, please contact James Macdonald on 020 8891 6141 or via j.macdonald@srb.co.uk

James Macdonald