In depth

Coronavirus: contractual issues facing businesses

Gateley Legal

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The COVID-19 outbreak is causing unprecedented, widespread disturbance to businesses on a global scale, bringing with it an unsettled economy.  If you are experiencing problems, then you are not alone.  

What can you do?

Frankly, the practical options may be limited. The point is, if supply chains are not moving, then there is no contract written that will free the logjam, but the immediate problems with the movement of goods and the changes to demand driven by a whole new way of living our lives could, in time, also lead to contractual disputes. For example, the inability to source components and the restrictions on movement of goods may give rise to contractual liability, for breach of contract.

Do I have a written agreement? 

Firstly, check that there is a written agreement in place governing the relationship which has been affected. If not, establish on what terms you are trading with your suppliers and customers. This may be evidenced by correspondence and/or trade practice i.e. what have you been doing routinely with a given supplier or customer. However, it is less likely that a non-written agreement or one based on correspondence will include force majeure or disaster recovery provisions.

If I do have a written agreement, will it help me? 

This really depends on the specific written agreement in question and how it is drafted. Written agreements may contain contractual clauses which may assist you. Whether this is the case will depend on how such clauses are drafted and may even depend on whether you are supplier or customer.  

Some written agreements will include force majeure clauses. A force majeure clause typically serves to excuse non-performance for reasons outside a contracting party’s control, such as a pandemic and related governmental action. It might cover the default of suppliers to keep you stocked, but it might not – much depends on the wording of the clause. The wording of the force majeure clause will need to be checked carefully. Some clauses refer to all causes outside of a party’s reasonable control, but in their simplicity such clauses beg a number of questions. For example: Is the supplier relationship within your reasonable control? If a supplier ceases delivering goods to you, is it within your control to source from a different supplier? These may all be factors to consider, which all depend on the specific commercial arrangement and drafting of the written agreement in question. It’s worth noting, a force majeure clause is not designed to shield you from all difficulties, it is there to save you from legal liability in a particular situation, if there is nothing within your control that can be done to avoid non-performance.

When reviewing a force majeure clause, it’s also relevant to think about timing. There will be a point in time when a line is crossed – before that time, matters will be deemed to have been within your control and afterwards, they are not. You will need to think about when that line crossed. This is particularly key because issues that arose, which relate to the period before the line was crossed may not be protected by the force majeure clause. It is not correct to assume that the existence of a force majeure clauses in your written agreement will automatically save you from legal liability. 

As noted above, whether a force majeure clause can aid you will all come down to how it is drafted, what your position is and what the outcome you are seeking is. There may also be a sting in the tail – many written agreements, which include force majeure clauses also allow for termination of the agreement if the force majeure event subsists for a period of time, which can be as short as 30 days. It is going to be a while before supply chains return to normal and if you jump in and use the force majeure clause to fend off immediate legal liability, you could inadvertently start the clock ticking down to termination of the written agreement. This may not be the outcome you were hoping for, so take care with force majeure clauses. Indeed, getting advice on the clauses and its consequences is worth considering even if it is not right at the top of your action list just now.

The truth is, most force majeure clauses will have been written as standard and without full consideration of the circumstances now being faced across the globe. As such, clauses are not going to address the specifics of the present situation and will need very careful consideration. 

If I don’t have a written agreement, what can I do then?

You may be able to look to the doctrine of frustration, which gives a party the potential to be discharged from any contractual obligations if there is a change in circumstances which would make performance of the agreement impossible either physically or commercially. 

This is a hard test to meet and is only generally applied in very narrow circumstances. It is also more often applicable for a one off matter, such as an event, as opposed to a series of obligations, such as the ongoing supply of goods.

Is there anything else which may assist me? 

  • Do you have insurance cover in place? 
  • Can you benefit from the government assistance package? 
  • Do you have a governing or trade body which will be able to support you?  

What should I be doing now? 

  • Check if you have a written agreement in place, which could be in the form of standard terms and conditions or an order form.
  • If you have something in writing, check if there is a force majeure clause and what other clauses within the written agreement that may assist in your situation. 
  • There may be some benefit in beginning early discussions with the other party. However, you should complete a thorough assessment of your position prior to doing this. 
  • Follow government guidance or those of your governing or trade body, if applicable prior to taking any action, including any discussions with the other party. 
  • Get in touch with Gateley before acting or sending any kind of communication to ascertain your legal position based on your current circumstances. 
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