Managing your commercial contracts during COVID-19

Image of Managing your commercial contracts during COVID-19

By Jayne Jones, Corporate Solicitor.

In light of the accelerating speed of COVID-19 and the prospect of the great unknown a lot of businesses will want to know what they should be doing to manage their commercial contracts.

Generally a force majeure clause is the first port of call upon the occurrence of a pandemic.

What is a force majeure clause and when does it apply? A force majeure clause is typically used when one or both parties who have entered into a contract are in some way prevented from performing their obligations upon the occurrence of certain events. These ‘force majeure events’ are generally events which are outside a party’s control (such as a pandemic). The party that has been prevented from performing their obligations under the contact will be able to be excused from or entitled to suspend their obligations under the contract in question. They will then not be liable for their failure to perform the obligations.

Effect of a force majeure clause. This will depend on how the clause is drafted but generally upon a force majeure event the effect will be one or all of the following:

1. Suspension. The affected party’s obligations do not fall away, instead they are suspended whilst the force majeure event continues (unless the parties agree otherwise). When the event comes to an end the contract will be start up again and continue.

2. Non-liability. The affected party’s liability for non-performance is removed for as long as the force majeure event continues.

3. The right to terminate. Some force majeure clauses go beyond suspending the contract, they can sometimes allow either or both parties the right to serve notice terminating the agreement after a certain period of time.

Burden of proof. It is the party that is seeking to rely on the force majeure clause that must prove that the event falls within the clause and that the non-performance of their obligation was due to that event. 

Mitigating your loss. If your contract does include a force majeure clause this does not mean that you can declare you are excused from performing all of your obligations under the contract, it is important that the affected party can show that they have done all that they can to mitigate the effects of the force majeure event, for example: source goods and/or services from an alternative supplier.

Important points to note:

1. If one party is prevented from performance under the contract because of the other party’s breach of that contract, the innocent party cannot rely upon a force majeure clause;

2. The force majeure event must be the only effective cause of default, there can be no other reason for non-performance of the contract;

3. The term force majeure has no recognised meaning under English law. The use of this term alone if likely to be effective, the contract should refer to specific events; and

4. Events that are foreseeable are generally not covered. For example a supplier cannot rely upon a force majeure clause if the events should have been reasonably foreseen – a supplier should have contingency plans in place to mitigate their loss.

What if a contract does not include a force majeure clause? The contract could be terminated on the grounds of frustration. Frustration is a right of law (not a contractual right like with force majeure) and is when something happens after the contract is entered into which will then render it physically and commercially impossible to fulfil. If a contract has been frustrated, the parties are automatically discharged from their current and future obligations under the contract. However, the burden of proof for frustration is high and is very difficult to rely upon. If it is to be relied on legal advice should be sought.

Non-contractual relief. It is important to bear in mind that although you may have entered into a contract as either a supplier or a customer, rather that turning straight to the contract and enforce specific clauses it may be more practicable to speak to the other party and see how Covid-19 may affect the performance of the contract you have entered into. By both parties speaking openly you may be able to find a solution that is manageable and in the best interests of all parties; although if the parties do create alternative arrangements that differ from the original contract it is best to have those changes documented.

Please note that the contents of this blog are for information only and should not be relied upon as legal advice. Legal advice should always be given in relation to specific circumstances. If you are seeking legal advice for your specific circumstances please contact us directly.