Impact of Covid-19 (Coronavirus) on commercial contracts: Some Practical Tips

Mar 18, 2020

Businesses are facing increasing uncertainty in light of the rapidly evolving Covid 19 (Coronavirus) situation.

As matters develop, a growing number of businesses are finding it impossible, or at least more difficult, to deliver on their commercial promises.

From an English law perspective there are a number of legal principles and considerations that businesses should be alive to as the situation develops, whether acting as supplier / seller or customer, including:

Frustration: 

  • A contract can be frustrated when something occurs after the formation of the contract that renders it impossible or illegal to fulfil, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
  • Frustration is a legal concept and will not be written in to contracts. It is a narrow concept and the burden of proof is on the person seeking to assert it.
  • Depending on the relevant facts and circumstances, it is possible that Coronavirus could potentially act so as to frustrate a commercial contract.
  • For further information on frustration, please see our article “Brexit: Frustration in a commercial contract”

Force majeure:

  • Many commercial contracts will include a “force majeure” clause.
  • A force majeure clause typically excuses one or both parties from performance of the contract in some way following the occurrence of certain events which are outside a party’s control. It is not uncommon for such clauses to refer to epidemics and pandemics.
  • Such clauses usually feature in the “boilerplate” clauses of the contract and are often not heavily negotiated by the parties, only being scrutinised when an unplanned event occurs.
  • Whether or not a force majeure clause will be helpful in the context of Coronavirus will depend on the wording of the clause (if the contract includes such a clause at all), since there is no set wording for force majeure clauses – it is down to the parties to document what comprises a force majeure relief event and how the relief mechanism can be triggered. Contracts therefore need to be reviewed and assessed on a case by case basis.
  • For further information on force majeure, please see our article: “Impossible to perform a contract – are you still liable?”

Business continuity obligations:

  • It is not uncommon for service providers and suppliers to be obliged to implement business continuity arrangements in the event that they foresee or face disruption to their businesses.
  • – With potential for labour and material shortages, and supply disruptions, businesses should review whether or not they are subject to business continuity obligations, and should ensure that they are following the process required by the contract and that they are keeping an audit trail of what they have done so that they are able to demonstrate compliance.

Practical tips:

Early review

  • Businesses should review their contracts early to understand the position regarding any disruption that may be experienced, and the impact that it may have on their contractual arrangements.
  • This applies to both customer and supplier contracts since businesses need to understand their supply chain risks, as these are likely to feed in to their customer contract risk assessment.
  • Businesses are likely to feel the effect of Covid-19 (Coronavirus) and its aftermath for some time – if it is identified during the contract reviews that existing relief mechanisms are not sufficient, standard terms & conditions and contract templates should be updated and rolled out as soon as possible.
  • If it is considered that existing contracts pose unacceptable levels of business risk, businesses could seek to vary or update the terms applicable to existing contracts – how this is done and whether or not it can be done unilaterally or will require consent will depend on the contract terms.

Follow the contract process.

For example, force majeure clauses often contain formal notification requirements and formal timescales for making such notifications.

  • If the requirements of the relevant clause(s) are not followed, it can have disastrous consequences for the business seeking to rely on the clause(s) as, for example, it may lose the ability to trigger the protections that the clause would otherwise have provided.
  • Keep appropriate documents and records to show that the various processes and procedures have been complied with.

If you agree to different terms, document them.

  • It is not uncommon for businesses to agree alternative solutions when faced with supply challenges or business disruption – indeed it makes good commercial sense in many cases, particularly where many businesses are likely to be similarly affected (e.g. in the case of pandemic / epidemic).
  • Solutions can vary greatly, and could for example include allowing more time for goods / services to be provided, or might include an alteration to the agreed service scope or pricing.
  • Many commercial contracts will contain clauses stating that changes will not be valid unless in writing and signed by or on behalf of the parties – it is important that any such requirements are complied with to ensure that changes are valid and binding on the parties.
  • Similarly, if resolutions are reached where there have been contract breaches, these should be properly documented in a settlement agreement to ensure that the terms of the resolution are clear, and that a line is drawn under the matter.

Contract management.

In times when there is increased risk of supply disruption, contract management is more important tan ever.

Whether a business is a customer or a supplier in the context of the relevant contract, it should:

 Understand the applicable contract terms – in particular ensuring that the available contract relief mechanisms are understood and are properly implemented at the appropriate time.

 Engage with the customer / supplier to implement practical steps to minimise the risk and effect of disruption.

 Monitor performance against the agreed contract terms so that issues and potential issues are spotted early, and contingency plans can be implemented in a timely manner.

 Understand and implement escalation and dispute resolution procedures as required by the cotract terms at the appropriate times.

 Understand the alternatives – if for example the services / goods can not be sourced or sold elsewhere, it will factor in to how the business approaches the situation. Termination might not be appropriate, even if it is available as an option.


How can we help?

If you are concerned about the potential impact of Covid-19 (Coronavirus) on your commercial obligations, take expert legal advice as soon as possible.  

We provide expert advice on commercial contracts – contact the experienced commercial solicitors at Herrington Carmichael LLP for specialist advice as soon as possible.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

 

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