Covid-19: What does it mean for my business's commercial contracts
commercial contracts

COVID19 – What does it mean for my business’s commercial contracts?

We all skim over terms and conditions and rarely take the time to read the detail. But the current pandemic and subsequent lockdown are unprecedented and the impact on small and medium sized businesses is huge, so what you have agreed with your customers and suppliers and how you meet those obligations is more important than ever. Faced with so much uncertainty, you may be asking yourself – do I have to give all my customers a refund? How can I fulfil orders when my suppliers haven’t delivered? How will my business survive with no new orders? Now is the time to look at your terms and conditions and other commercial contracts so you know where you stand.

Here we offer some guidance on the types of clauses to look out for in your contracts with customers and suppliers to see if they offer any relief. If your commercial contracts do not include some of these clauses you may want to think about including these in future contracts.

Variation of commercial contracts

At this time, you may want to change the terms of a contract – for example the payment terms or a delivery date. This can be done with the agreement of the other party, but it will be important to check your contract to see if there are any formalities required to affect a variation. For example, you may have a variation clause which sets out that any variation needs to be in writing and signed by both parties. Whether or not in writing includes email will also depend on the terms of your contract.

For a variation to be effective there also needs to be some form of consideration (e.g. mutual abandonment of existing rights) – if one party grants a concession to the other party for their convenience this would not satisfy the consideration requirement. Alternatively, the variation would need to be executed as a deed*.

*If a document has to be executed/signed as a deed, depending on whether a party is signing as an individual or on behalf of a company or other legal entity, the signatures will require witnessing or more than one signatory may be required.

Waiver clauses in commercial contracts

Are there some contractual obligations that you could waive or ask the other party to waive? And if so, what effect does this have on the other parts of the contract? If a party under a contract fails to perform an obligation under that contract, the innocent party has various options which include asserting their rights and remedies under the contract, complaining about the breach but taking no action or ignoring the breach. If the innocent party takes too long to decide what course of action to take it may lose or waive its rights to take action against the defaulting party for that breach (or similar breaches in the future). It is therefore important to check if your contract has a waiver clause in it – such a clause preserves the innocent party’s rights if that party fails to take action in respect of a breach of contract.

Force majeure

You may have heard this term being mentioned a lot when talking about the impact of COVID19 on commercial contracts, but what does it mean exactly?

In common law* jurisdictions (such as England and Wales) force majeure is not implied as a matter of law and must therefore be explicitly included in a contract. A force majeure clause in a contract is intended to cover unforeseen events that might have a major impact on you or a customer’s or supplier’s ability to fulfil your or their obligations under the contract, thereby avoiding liability for non-performance. Some force majeure clauses are broadly drafted to include “any circumstances not within a party’s reasonable control”, other clauses include specific examples such as “acts of God” or “natural disasters” or “any action taken by a government”. However, not all force majeure clauses are well drafted and not all contracts include one.

You should check to see if you (a) have a force majeure clause, (b) what it covers and (c) the formalities you need to follow if you wish to invoke such a clause. There is some debate as to whether a pandemic would be covered if it is not specifically mentioned in the clause or if the exceptional government measures that have been taken could also be covered.

If a force majeure clause is included in a contract this would usually give one party the right to suspend the contract for a certain amount of time until it became possible to continue. Some force majeure clauses would allow the other party (the one not relying on the clause) to terminate the contract without liability if the intervening event continues for a specified period of time.

You should note that if you try to rely on a force majeure clause, you may also need to prove that you have taken steps to limit or mitigate the effect of the force majeure event. This could include discussing any disruption with customers and trying to find possible alternatives.

* common law is legal precedent made by judges sitting in court

The doctrine of frustration

Another way to end the contract may be to rely on the common law doctrine of frustration. There is, however, a very high threshold to meet in order to rely on it so it should always be a last resort. Essentially, a contract may be discharged on the grounds of frustration (so that the parties are no longer bound to perform their obligations) if, through no fault of either party, something occurs after the formation of a contract which renders it physically or commercially impossible to fulfil the contract or transfers the obligation to perform into a radically different obligation from that undertaken when the contract was entered into.

You should be aware though that it’s not enough for performance of your obligations to be more expensive for you to invoke the doctrine of frustration. The event must have been unforeseeable and render performance impossible. Also, if the parties have made express provisions for the consequences of the particular event that occurs (e.g. there is a force majeure clause in the contract which covers the situation) it has been held that a contract was not frustrated.

Termination of a commercial contract

If your business needs have changed, you may be thinking of terminating your arrangement with, for example, a supplier or a consultant. Furthermore, whilst a customer’s failure to pay under a contract may not be sufficient for them to rely on force majeure or frustration, it may equal a breach of contract and therefore entitle you to terminate and claim compensation.

Although you may also have a common law right to terminate a contract, you should first check the contract to determine the contractual provisions which allow you to terminate (for example there may be a provision allowing you to terminate upon written notice for convenience or you may be allowed to terminate for a material breach of contract). It is important to make an informed decision about which ground you wish to rely upon to terminate and to carefully word your termination notice so that any necessary formalities are met (for example there may be a notice period allowing the other party to rectify a material breach of contract). The grounds you rely on may also have an impact on the compensation you can claim..

Giving notice under a commercial contract

You should look carefully at the notices clause in your contract to ensure that any notices you serve are served correctly. Is email acceptable? Does that email have to be acknowledged? Do you have to use recorded delivery? On what date will service be deemed to have taken place?

What’s next? Is it time to review your commercial contracts?

While your contracts may spell out exactly what you can and cannot do, in practical terms you are going to want to do everything that you can to maintain your long established relationships with your customers and suppliers. Under normal circumstances, if you were not able to deliver your product or service, you might offer a straightforward refund. In the current climate, you may want to negotiate offering credit or rescheduling events or delivery. Clearly, whilst everyone may not be in the same boat, we are all in the same storm, so there needs to be some give and take from both sides. That being said, you do need to take into account whether you are dealing with business customers or the general public because the general public will be protected by consumer legislation.

Please note that this article is for information purposes only and does not constitute legal advice

Authors:

  Deborah Pawley & Elizabeth Owen, Business Advisers

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