Commercial contracts & coronavirus: What are the implications?

As the coronavirus (COVID-19) pandemic develops, we have seen significant disruption to businesses across multiple sectors in the UK. Understandably, this has led to widespread concern about the implications for existing commercial contracts.

There are a number of protection mechanisms which can provide relief from the performance of obligations under a contract. However, the implications of invoking these could be substantial and therefore it is crucial to take legal advice early on.

The protection mechanisms available will largely depend on what the contract says and the facts of the situation, but you should be aware of the following.

Force majeure

A force majeure clause within a contract relieves a party of its contractual obligations should they become impracticable or impossible to fulfill as a result of an unexpected, uncontrolled event. Under English law, force majeure is a contractual mechanism and not a common law concept. This means that it must be included within the contract in order to be invoked.

Whether or not performance under a contract can be excused or delayed under a force majeure clause will depend on the drafting and interpretation of the clause. Parties seeking to rely on a force majeure clause should:

• Check whether the clause lists specific events including epidemics, pandemics or contagious diseases. If not, and more general catch-all language is used, whether the parties intended that event to be covered comes down to interpretation.
• Consider how the clause specifies the impact that the event must have in order to be triggered. For example, the terms “prevented”, “hindered”, “delayed” or “affected” may look similar but they each require different levels of impact on performance before the party seeking to rely on the clause can be relieved from liability.
• Be compliant with any procedural requirements. For example, this could be a requirement to give notice of intention to rely on the force majeure clause, along with any formalities necessary for serving these notices.
• Keep a written record of the reasons why performance was impossible, hindered or delayed, and the steps taken to find alternatives and mitigate loss.

Material adverse change

A material adverse change clause in a commercial contract may excuse performance or permit a party to terminate the contract upon the occurrence of a material adverse change.  Again, this will depend on how the clause has been drafted. For example, whether material adverse change has been defined and whether it is clear how the parties’ rights and obligations will be affected by an event caught under this definition.

Frustration

If a contract does not contain a force majeure or material adverse change clause, it may be possible to rely on the common law doctrine of frustration of contract. A contract may be frustrated where it becomes impossible to perform, or where, as a consequence of an event (such as COVID-19), a party’s contractual obligations become radically different to what was contemplated at the outset. If a contract is frustrated, the contract will immediately be terminated and both parties released from performance. As with force majeure, the fact that performance has been delayed or made more difficult or costly is not enough to say that a contract is frustrated.

What can I do?

You should always consider the business relationship before invoking any of the protection mechanisms referred to above. Instead, they may be used as leverage to negotiate a way forward without having to terminate the contract. You should also check whether the contract contains any variation and change control provisions and whether there is a severability clause which may need to be invoked if there is a change in the law and a part of the contract is found to be unenforceable. Such provisions could also prevent the need to terminate the contract.

As well as considering your commercial contracts, you should check your insurance arrangements to see if these cover losses arising from the COVID-19 outbreak or its knock-on effects.

We’re here to help

We appreciate that it is a confusing and uncertain time, but we’re here to help. Our corporate and commercial lawyers are fully equipped to advise you on your rights and obligations in this most unusual situation. Our legal services are operating as normal, with all of our lawyers able to work safely from home.

We’re regularly updating our website with more COVID-19 legal insights, so keep an eye on willans.co.uk/covid19 for the latest legal perspectives relating to the coronavirus.