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Coronavirus (Covid-19): the impact on your commercial contracts

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The outbreak of Covid-19 has had a significant impact on business; trade and commerce has been affected to an unprecedented degree. This downturn has had a detrimental impact on our economy, which in turn has impacted business, trade and commerce.

Written by
Billy Shaw

The outbreak of Covid-19 has had a significant impact on business; trade and commerce has been affected to an unprecedented degree. This downturn has had a detrimental impact on our economy, which in turn has impacted business, trade and commerce. We would advise you to check over your commercial contracts during this time.

Most businesses in the UK will be affected as Covid-19 leads to disruption across sectors.  

In this environment, many businesses will be prevented from fulfilling obligations under commercial agreements and may be looking to see how they can bring those contractual arrangements to an end, or otherwise resist having to comply with contractual terms.

Termination provisions

Some commercial contracts allow a party to terminate before the contract has otherwise run its course. Clauses which are indicative of a right to terminate include:

  • Termination by Notice: how much notice (if any) you are required to give the other party to the contract in order to terminate. It is likely that you would need to give notice in a certain way and failure to comply with those instructions risks your notice to terminate being invalid. Consideration should be given to where notice is to be sent and any applicable timescales.
  • Rights to terminate immediately: This right usually arises where the other party is in material breach of contract or other certain circumstances (e.g. it is on the verge of insolvency) subsist. You should consider the other party’s obligations and whether they are holding up their side of the bargain. You should also give consideration to whether the wider effects of Covid-19 will affect their cashflow.
  • Consequences of termination: It is common for contracts to expressly set out the consequences of termination, which may include: the payment of liquidated damages, acceleration of monies due and payment of out-of-pocket expenses. You should therefore ensure that you have considered the risks and costs of termination before seeking to do so.
  • Ongoing obligations: Some obligations in commercial contracts are expressed to survive termination. A common example is confidentiality obligations. You should therefore ensure that you are satisfied with any obligations that may remain post-termination.

If you can terminate, even at notice, you should give serious consideration as to whether termination, taking into account the consequences of termination and any ongoing liability, is in your best interests.

Force Majeure

Force Majeure clauses serve a specific purpose in commercial contracts. Where a party cannot perform their obligations under the contract due to the happening of a specified event beyond the parties’ control, the force majeure clause is designed to allow one or both of the parties to:

  • cancel the contract and be excused from performance of obligations indefinitely; or
  • suspend the performance of obligations for a specified period of time.

In order to rely on a force majeure clause, you must show that the clause covers the event that is preventing you from performing your obligations. This may include an act of God (including a storm or tempest), war, government sanction, pandemic/epidemic, disease or strike. Force majeure is a contractual concept and if the wording of the clause does not cover the event in question, you will not be able to rely on it.

It is unlikely that a force majeure clause would refer specifically to Covid-19 as it is a novel Coronavirus  and is a relatively recent outbreak. Specific consideration of the wording used in the clause is therefore required to see whether the clause covers things such as disease, government action and pandemic/epidemic.

Depending on the wording of the clause, you may be required to show that the specified event has made it impossible for you to perform your obligations under the contract. Where a clause merely requires the specified event to have “hindered” or “delayed” performance, this is easier to satisfy.

As explained above in relation to “termination”, commercial contracts will outline how notices are to be given. If you are going to rely on a force majeure clause, you should also ensure that you comply with the notice provisions in the contract so that your notice is valid.

You should seek advice before invoking any force majeure clause in your contract as serving a force majeure notice without justification has the potential to give rise to a breach of contract in itself. The risks are therefore substantial.

Frustration

Where you do not have a force majeure clause in your commercial agreement, or your force majeure clause does not cover the circumstances that we find ourselves in, the legal doctrine of frustration may be another way to get relief from your contractual obligations.

The effect of a frustrated contract is that the contract is immediately brought to an end with all parties released from their contractual obligations.

As an operation of law, frustration does not need to be specifically referred to in your commercial contract. Whether Covid-19 can amount to frustration of contract depends upon the circumstances and obligations of the parties to the contract. Many contracts will be performed with no issue. However, some contracts will require a party to do something which, in the current circumstances, in impossible or illegal due to government or legislative action. Each commercial contract should be considered on its own merits.

Practical points

In summary, with the outbreak of Covid-19 (and the impact that it will inherently have on the performance of commercial contracts), you should:

  • think about your obligations under your commercial contracts;
  • consider what action you could take in relation to your commercial agreements with the best interests of your business in mind;
  • review your commercial agreements in full (focusing on your obligations, termination and force majeure provisions); and
  • Seek advice – this document does not replace the need to seek specialist legal advice.

Contact Us

Our Commercial Agreements lawyers would be delighted to assist you with reviewing and advising on your commercial contracts. We can assist parties who are asserting or receiving force majeure notices. Call us on 0115 9100 600 today.

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