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Commercial contracts in the time of COVID-19

Posted 09/04/2020

Commercial solicitor, Natalie Stoter, discusses commercial contracts and clauses in the context of COVID-19*. 

The uncertainty of the current world is understandably causing many businesses to review their contractual arrangements with their suppliers, customers, distributors and commercial partners.

Commercial contracts that were negotiated at a time when “pandemic” was more likely to be the title of the next Hollywood disaster movie are now being dusted off and scrutinised closely.

Law firms are receiving many enquiries from worried clients regarding commercial contracts, and as a profession, we are here to help UK businesses get through this very difficult time as unscathed as possible.

This article aims to provide practical guidance to those reviewing their contractual arrangements closely in light of Covid-19.

Case study**

A client runs an owner managed business based in East Anglia. The business sources fabric from several suppliers within the UK that it uses to make high quality shirts. Those shirts are distributed to several London based customers including designer brands and department stores.

Sales of the shirts in London stores have dropped considerably since the outbreak of coronavirus. The client is concerned what the business’ position is in respect of its supplier and distributor contracts.

Contract review

Firstly, we would recommend to any client in a similar situation to the case study, to get hold of the relevant contracts for the commercial relationships they are concerned about. For many businesses, this will mean contacting their solicitor or other business advisors to obtain a full and final copy.

Our shirt maker business has several supplier and distributor contracts which it wishes to review. Particularly the decrease in shirt sales has meant that the business’ distributors are seeking to terminate existing contracts, and similarly our client is seeking to terminate its contract with its fabric suppliers.

Can I simply terminate a commercial contract?

The answer to this is, it depends!

Every contract will have been negotiated and agreed on individual commercial circumstances. We strongly advise businesses to obtain specialist legal advice when reviewing their contractual arrangements, and certainly before seeking to terminate any contracts.

Force Majeure

Force Majeure is a boiler-plate clause that is very rarely negotiated between lawyers and is contained in most commercial contracts. The clause aims to protect the parties from a breach of contract claim if they are unable to perform their obligations under the contract due to events that are outside their control. The clause will often provide for the suspension of the performance of the contract while the force majeure event continues, enabling the parties to resurrect the contract once the event is over.

English law has no rule regarding force majeure. This means that if there is no force majeure clause in your contract, then you cannot rely on force majeure at common law or in statute.

Some force majeure clauses will specifically mention “pandemic” as a force majeure event, some may not. However, the unforeseen nature of the disruption that COVID-19 has caused to our lives and businesses is the type of situation that force majeure is designed to apply to.

Whether the force majeure clause specifically lists “pandemic” as an event, does not automatically mean that performance of the contract can be suspended or delayed. Often, the event must have a certain level of impact to be triggered, for example, the event must “prevent”, “hinder” or “delay” performance of the contract.

You can therefore see how whether force majeure is triggered by COVID-19 depends upon the facts of the individual case and the impact in the context of the contract.

Frustration

Unlike force majeure, frustration is a common law doctrine. However, as with force majeure, frustration requires more than simply an event to be invoked - it applies when performance of the contract has become legally or physically impossible through no fault of the parties

A frustrated contract ends automatically and immediately, without any action by the parties, who then have only limited rights to redress.

The bar is therefore high for this doctrine to be invoked, and again, you can see how the individual facts of a contract will be paramount in determining its applicability.

There are other options which parties to a contract may wish to consider.

Termination

Most contracts will contain provisions which allow the contract to be terminated in certain circumstances, or by the provision of a certain notice period. However, a party should consider the consequences, both practical and legal, before giving a termination notice to the other party as, depending on the importance of the contract, the impact on their business could be significant.

In addition, under English law, wrongful termination of a legally binding contract constitutes a repudiatory breach of contract by the terminating party, the financial consequences of which are usually significant for the “wrongfully” terminating party.

Variation

To the extent possible under the terms of a contract, and if the parties agree, then variation or re-negotiation of a contract could be a possible option. The parties should seek to comply with any relevant requirements of the contract, such as recording any variation in writing, and carefully consider the long-term impact of any proposed change. Accurate record keeping is therefore essential.

Getting specialist advice on commercial contracts

For expert advice on reviewing existing commercial contracts, contact Holmes & Hills Solicitors and ask to speak to one of the firm's specialist commercial solicitors, in the first instance, Natalie Stoter or Rebecca Mason. Call 01376 320456 (Essex) or 01787 275275 (Suffolk)

 

*Please note that this article was written based on the UK Government’s response to coronavirus on 8 April 2020. This article seeks to provide generic advice and should not be taken as legal advice tailored to your specific needs.

** The case study is fictional and not based upon any client of Holmes and Hills Solicitors.




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