Covid Uncertainty Forces Businesses to Rethink Contract Terms

By Peter Kouwenberg,Taylor Walton (www.taylorwalton.com)

There’s no getting away from the fact that global supply chains have been greatly affected by the outbreak of Covid-19 and the resulting lockdowns.To add to the problems, there is widespread confusion about where the responsibility for delayed, missed and incomplete deliveries should lay.

These issues once again highlight the importance of carefully crafted ‘force majeure (FM)’ clauses, as a thoroughly drafted clause can effectively address issues arising from unexpected future events that are out of the control of the contracted parties.

Although we are yet to see any significant judgments in large FM claims due to the time these cases take to reach court, Courts have handed down some judgments on injunctions related to FM clauses, stating that each one should be considered on its own words.

Therefore, businesses should ensure that FM clauses are drafted thoroughly, so they can be effective in defending a breach of contract that comes as a direct result of the ongoing pandemic and Government- imposed lockdown.

THE IMPORTANCE OF A GOOD ‘FORCE MAJEURE’ CLAUSE

When including an FM clause, it should enable the business to invoke a rights of suspension and/or termination of its duties and obligations under the contract.

The inclusion of the words ‘epidemic’ and/or ‘pandemic’ in the clause may be sufficient to trigger FM.Where these terms have not been included, the emergency measures to address or contain any outbreak, like a travel ban or quarantine zones, may be sufficient to trigger FM.

If a business seeks to invoke an FM clause, it must show that any failure to perform its contractual obligations cannot be attributed to other factors, such as any additional cost of performance.

Any FM clause cannot be taken in isolation, but interact appropriately with the other terms of the contract, such as any obligation to mitigate loss, and the procedure to notify the other party.

KEY ACTIONS FOR BUSINESSES IN 2021

First off, businesses should sit down and review the existing terms and conditions of supply and/or purchase, carefully scrutinising all proposed new contract terms to see if FM is included within it.

What is considered an FM event and what steps are involved in relying upon this clause? You must consider what effort to perform/minimise loss will be required from you and your supplier, so that bigger issues can be avoided if business performance is impacted.

Finally, consider the overall impact on the contract as a consequence of FM being triggered, like termination rights.Then check your insurance position regarding a supplier invoking an FM clause or you having to, hoping to protect your business.

Remember, if a contract does not include an FM clause, it may in limited circumstances be possible to seek redress on the basis of frustration, but this is a complex legal matter with very strict requirements to be met.

In English law, the concept of frustration is that contract obligations may be discharged in their entirety if an event has occurred, without the fault of either party, that renders it physically or commercially impossible to fulfil the contract.

Such an event might also transform the obligation to perform, into a radically different obligation from that agreed when the contract was signed, again allowing the obligation in the original contract to be discharged. However, it’s worth remembering the threshold for showing a contract is frustrated, is generally extremely high.

FORCE MAJEURE CLAUSE IS NOT A MAGIC BULLET

If you are worried that the pandemic and resulting restrictions will impact ongoing operations, then it’s important to send a contractually compliant notice to the other party, so they can take steps to protect themselves from any disruptions.

Where possible, businesses should consider alternative ways of performing the contractual obligations, as this will help protect the relationship, instead of leaving the other party to pick up the pieces and work through it.

Retaining written evidence of any disruption is essential, as either party may wish to take matters further, once the contract to supply has been terminated or suspended.

Whilst we await the outcome of COVID-19 FM claims, there is plenty for businesses to consider, from checking contract clauses cover all possible eventualities to checking they have adequate insurance cover, but a review of standard contract terms and conditions is a crucial first step.

About the author: Peter is an Associate Solicitor in the Corporate and Commercial department and deals with all types of commercial contract including terms and conditions of business, distribution agreements and subcontracting. He also has extensive experience leading mergers and acquisitions, including management buy outs and multi-million pound transactions, for a wide range of businesses.

About the firm:Taylor Walton is a renowned regional law firm, with more than 150 dedicated professionals, working from offices in Luton, St Albans and Harpenden, providing for businesses and individuals a full range of legal services, including Employment, Commercial Litigation, Professional Negligence, Corporate & Commercial, Commercial Real Estate, Residential Conveyancing, Private Client and Family Law.