By Clive Greenwood, partner at law firm Lewis Silkin (www.lewissilkin.com)
The second English lockdown has come as a body blow for many businesses in the hospitality sector.The Government-enforced restrictions mean many premises are again empty, workforces are operating remotely or on furlough and it has become impossible to provide certain services. The Government has offered some support and legal protections for struggling businesses but is not able to introduce substantive laws to assist businesses with their supply chain commercial contracts.
On 7 May 2020, the Cabinet Office produced a “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency”. Quite sensibly, the guidance recognised that commercial parties may find it difficult or impossible to perform their contracts and suggested that adjustments in contractual arrangements should be considered to avoid disputes escalating.
The sentiment is to be applauded, but the guidance issued by the Cabinet
Office didn’t offer any assistance to businesses on how to deal with their commercial contracts.
All this is fertile ground for potential supply chain disputes in the hospitality sector. For example, we can foresee problems arising in relation to goods ordered and delivered before lockdown which will perish on the premises or in a warehouse before the sanctions are lifted; disputes regarding goods ordered but which cannot be delivered or used while the restrictions are in place; pre-paid events being cancelled, and refunds demanded. So, what are the key steps that businesses need to take to prevent disputes arising?
REVIEW THE CONTRACT
A party that fails to perform a contract may not always be in breach and liable to a claim by the other party.Whenever there are difficulties with performing the terms of a contract, the parties should:
• review the contract and assess whether there are provisions which may excuse performance in certain circumstances or a force majeure term which may permit termination or suspension of the contract or the obligation; and
• consider whether the contract may, as a matter of law, be discharged entirely because it has become impossible to perform.
Don’t assume that there is an obligation from which there is no escape without breaching the contract. Review the contract with a fine tooth- comb and assess if there are options for avoiding or delaying obligations.
ENSURE THAT ANY VARIATIONS ARE BINDING
If obligations cannot be performed, parties must exercise careful thought and precise execution when considering the possibility of varying the terms of a contract.
In most cases, parties can make legally enforceable variations to their contracts provided that:
• there is “consideration” for the variation; and
• they comply with any requirements for amendment as set out in the existing contract; and
• the variations comply with any applicable law.
An essential element of contract law is that the recipient of a promised benefit must have been given something of value in return for that promise. If A promises to do something for B, then B can only force A to deliver what was promised if B has promised to give something in return. If there is nothing promised by B, a court will not force A to fulfil its promise.
Check written contracts for terms setting out how variations are to be made. The contract may stipulate that the terms can only be amended in writing and any amendments must be signed by the parties. Such provisions are often referred to as “No Oral Modification” or “NOM” clauses.
INAPPROPRIATE PRESSURE TO AGREE
In the supply chain, there are, regrettably, parties that seek to put pressure on the vulnerable to agree on contract variations.
English law recognises that circumstances do exist where a party should be relieved from an obligation to perform because it was subjected to threats when the obligation was agreed.
If “illegitimate pressure” is the “cause” of a party agreeing to a variation, that party may succeed in persuading a court that the amendment is void.
There is no escaping the fact that the second lockdown in England has put enormous strain on thousands of businesses in the hospitality sector. For businesses to survive, and in order to avoid legal disputes, commercial contracts do need to be reviewed, parties need to cooperate, and amendments need to be made with care.