In the wake of the Coronavirus pandemic, reviewing your Contracts is more important than ever

Key task for now…and in the future

The first task for any business is to review their contracts and these may vary depending upon whether your company negotiates a bespoke contract for each business relationship.

The second job, is to ensure that any contract you are entering into from now on has a wider drafted “force majeure” clause or exclusion clause to cover situations like this or ones that arise that are similar.

Why do I need to do this when the government has declared COVID-19 a pandemic?

Whereas the Chinese Government has issued force majeure certificates to companies that are unable in the current outbreak of the virus to satisfy their commercial terms, companies in England and Wales will find their position governed by their contract.

Key clauses in your contract

The key clauses to review in your contract are:-

  • Definitions,
  • Exclusion,
  • Force majeure
  • Termination clauses.

Why does everyone refer to force majeure and what does that mean?

Evident from its spelling, force majeure, is not an English term. It originated from French law.

This type of clause will usually outline what happens in the event of something unforeseen happening and what impact it has on the parties to the contract.

The principle is that if an event, defined in the contract, occurred that was out of the control of the parties, they could seek to rely upon this clause. The party unable to fulfil the contract are effectively excused from performing their obligations or entitled to suspend performing them. Law is rarely straight forward though so it will depend upon the circumstances and what the parties envisaged at the time the contract was drawn up.

These types of “force majeure” events are usually extreme and ones not caused by either contracting party.  In the past, they have been natural disasters and war.  Whether or not the current COVID-19 is such an unforeseeable event will depend upon how this has been defined within the contract itself.  Some clauses will refer to disease or epidemics.

Too late to add an exclusion clause?

A force majeure clause cannot be added to a contract at a later date. The parties seeking to use this specific exclusion have to rely upon what was understood at the time the clause was drafted.

The Courts when considering these clauses, interpret them true to their wording and therefore strictly.

Type of wording to look out for

  • An event was beyond reasonable control
  • An event significantly prevented or delayed the ability to perform the required terms. Under English law, if the event renders performance more expensive or less economical on the party performing the contractual obligations, it will not necessarily mean that it falls within force majeure or
  • Obligations to take steps to mitigate the position

The scope of the clause therefore would dictate its coverage.

Frustration

There will probably be a lot of frustration with the uncertainties…but the legal implications of a contract frustrated are clear.

It may be that if your force majeure or clause does not apply, then your contract could be frustrated under English law.  Frustration means that if an event prevents a party fulfilling its contractual obligations and they are commercially impossible, the contract can be deemed frustrated.

The contract is automatically terminated upon the occurrence of the frustrating event.  As neither party is at fault and there is no party therefore against whom damages can be claimed, the common law provides that losses are dealt with where they lie.

Would a Court classify the COVID-19 as a force majeure event?

It depends upon your contract.

There is currently very limited case law testing the scope of the clause and we go back to 1920 and the case of Lebeaupin v Crispin [1920] 2 KB 714 which suggests that an epidemic may constitute a force majeure of event:

“Force majeure. This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control…  this, war, inundation is and epidemics are cases of force majeure or; it has even been decided that a strike of workmen constitutes a case of force majeure”

The above has not been tested in court relative to these current circumstances. The contract will play a big part in the interpretation of the various clauses.

What do I do now?

  1. Review each contract and check in the aforementioned clauses: definitions, force majeure, exclusions and termination alongside any further time bars and performance criteria
  2. Assess based upon the wording and any information that is available as to when the contract was drafted, whether the force majeure or clause is likely to cover COVID-19 or not
  3. Take steps to mitigate any non-performance – what measures are you putting in place and what actions form part of your business continuity policy?
  4. Have conversations with the relevant parties in an attempt to work together to find solutions.
  5. Consider the impact of the terminating the contract and any losses that may be it arising as a result. This could be an expensive option for you so not one to be taken lightly and without a full review;
  6. Consider your legal position and gain advice.
  7. Consider any reputational risks.
  8. Consider whether declaring a force majeure or receiving a force majeure claim impacts upon any insurance arrangements that you have in place. You should be checking your insurance in any event.
  9. Any new contract should make provision for COVID-19 (with a wide definition if possible)
  10. At a time when we are bombarded with negative news and challenges, review how you can improve your working relationships with your customers and supply chain to show that you are proactive, collaborative and responsible. There is always an opportunity for good to come from a difficult situation. Morrisons declared that they would pay all small businesses supplying their stores much sooner. They are in a position to be able to do this and many can’t. What can you do that shows how you respond positively in these times?

For more information on Contract Law negotiations or drafting, contact our Business Services team or, for information on how to handle a contract dispute due to the current pandemic situation, please contact our Dispute Resolution team who would be happy to help. Call 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Disclaimer: The information provided on this blog is for general informational purposes only and is accurate as of the date of publication. It should not be construed as legal advice. Laws and regulations may change, and the content may not reflect the most current legal developments. We recommend consulting with a qualified solicitor for specific legal guidance tailored to your situation.