Tag: Commercial Contracts

The Effect of COVID-19 on Commercial Contracts

We have seen in recent days that the outbreak of the novel coronavirus, Covid-19, is bringing uncertainty to many businesses. The unprecedented restrictions in travel across the world and the cancellation of many public events is impacting upon many supply chains. In turn, we have seen large numbers of businesses begin to operate flexibly by developing alternative means of work, and a smaller percentage suspending operations altogether.

At this time, many businesses are rightly considering the contractual and legal issues arising from this extraordinary situation.

Understanding your contractual position

Generally, the parties are required to perform their obligations set out in a contract in full by any deadline specified.  This applies to performance of all contractual obligations, including payments due. However, there are two common exceptions to this rule:

  • Force Majeure – A number of written contracts will include a force majeure clause. A force majeure clause will usually suspend or end performance obligations where a party is prevented from performing its contractual obligations due to events outside of its control. However, even when they exist within a contract, the wording and protective scope of force majeure clauses can differ. As a result, it is necessary to consider the wording of the specific clause to determine (i) whether Covid-19 amounts to a force majeure event under a particular contract; (ii) the impact of the clause; and (iii) whether any other conditions need to be satisfied, such as notice requirements.
  • Frustration – Even where no force majeure clause exists, the legal doctrine of frustration may be available in situations where a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different. The bar for relying upon frustration is high, and, similar to relying on a force majeure clause, a party seeking to rely on such may be open to legal challenge by a counterparty to a contract.

Although most businesses who are currently concerned about their contracts will want to consider the above two points, it is advisable that businesses seeking to rely on such obtain legal advice before purporting to rely on either the contractual relief of a force majeure clause or the legal doctrine of frustration.

Varying existing agreements to improve probability of performance, maintain relationships and bring certainty

At this time, we are seeing an increase in companies approach us with concerns over their ability to discharge their duties under their contracts, as well as being concerned about the ability of others to perform theirs. Even where strict legal rights exist, it is not always commercially astute to enforce them and there are situations where it is prudent to seek to relax performance requirements, in order to maintain relationships, aid cash flow and prevent the need for crippling legal action.

In relation to this, we are advising businesses to:

  • Understand your strict legal position, to determine whether you are negotiating from a position of strength or weakness.
  • Not verbally or informally change terms in your contracts (particularly in relation to material or major contracts). Rather, we recommend that you formally record any variations that you may agree in writing (it may even be a requirement in your contracts that such variations are in writing as agreed between the parties).
  • Carefully consider the practical impacts that any variations will have. The choices you make as a business will reflect the commercial constraints which are unique to you, such as the importance to you of cash flow, your ability to make internal decisions and reputation management. These elements differ from business to business and there is not a one size fits all approach that should be taken.

The options available to you very much depend on what the terms of your contracts state, and it is important that any variations that you make are made only when you fully understand the impact of such on your contracts as a whole.

Most businesses will want to consider what their obligations are and whether they can still practically achieve them. Customers experiencing cash flow issues themselves will probably want to look at alternative payment options. When dealing with customer concerns, businesses may be able to agree to split payment into a number of instalments over a set period of time to ease cash flow for the customer, but to ensure payment in full is received in time by the recipient business.

Such steps can assist from a reputation point of view in these hard times. For businesses that are able to weather the storm that Covid-19 now presents, they want to ensure that they come out with a loyal customer and supplier base to continue trade in the future.

Continued use of standard contractual documents

Covid-19 has caught society and many businesses by surprise. Business continuity is now being tested across many sectors in the UK, and in turn businesses will shortly discover the robustness of their legal documentation.

Many businesses in the UK trade on standard terms of business – in most cases, it is prudent to do so. In the current climate it is advisable to consider whether any amendments should be made to your standard contractual documentation to provide protection to your business in the coming weeks, months and beyond in relation to Covid-19 and any similar pandemics that may arise in the future. For example, many force majeure clauses reference unforeseeable events. It could be argued that, for contracts entered into six months ago, Covid-19 may satisfy this definition, but it is unlikely to do so in relation to contracts being entered into in the coming weeks.

The content of this advice article has been kindly provided to AD:VENTURE by Sarah Briscall and Joe Gosling, members of the Commercial Team at Shulmans LLP

Shulmans LLP will become Knights plc on 24 April 2020

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