By Martin Noble, commercial partner at law firm, Shakespeare Martineau
COVID-19 is putting a deep strain on almost all areas of UK business. With inbound payments decreasing and cash flow slowing down, many companies are struggling to cope with the effects of the outbreak. So, what steps can businesses take to ensure they are in the best position possible to navigate these uncertain times?
Suppliers and customers can be reluctant to have conversations about money with their contractual partners. This may be because they are concerned it will damage relationships, or it may be down to British politeness. Whatever it is, these discussions are needed to survive.
If a company decides that they need to take advantage of the money-saving clauses in a contract, then they should first look at the contract document as a whole. It could be the case that the arrangement is coming to an end soon anyway, providing a natural talking point to discuss changes to the future of the contract, or even ending it early.
For those that are not coming to a close, there are several agreements and clauses to consider, for example framework agreements. Some may already have flexibility built into them, where one or both parties aren’t necessarily obliged to make or accept orders if they cannot afford them. However, if the contract does not allow for this, then now is a good time to assess whether the agreements can be altered to improve their effectiveness in the current situation.
When it comes to clauses, force majeure is likely the most relevant during this pandemic. Invoking this excuses one or both parties from carrying out their obligations in some way, due to a disrupting event making it impossible to function normally. Often such events are listed to help with clarity later on but doing this can act as a blocker should the event not be listed. Nevertheless, it is still worth having the conversation. Once things return to normal, the contract can then be resumed.
Frustration is another option for companies struggling to stay afloat. This is similar to force majeure, but an express clause is not needed and both parties have to demonstrate that their obligations have been completely undermined by the disrupting event. Should the evidence be sufficient, the contract can then be ended. The threat of invoking frustration can be a powerful bargaining tool should a business wish to be free of their obligations quickly. However, it can be a challenge to rely on the narrower conditions for frustration to apply successfully.
Lastly, although not always an express clause, an outstanding payment can sometimes be used as a reason to suspend a contract. Payment is a fundamental term of any agreement, even if the rest of the contract appears to be inflexible.
For businesses wanting to avoid invoking legal principles or clauses, a good faith approach can be taken instead. Rather than arguing over the contents of the contract, or walking away altogether, suppliers and customers can negotiate a way forward. Recognising that everyone is in the same boat, and being transparent about their own situations, allows companies to manage the contractual relationship without jeopardising its future.
Usually, if a party tries to invoke a clause, the other party would try find a counter argument. However, this could lead to a costly dispute with nothing productive happening in the meantime. As such, it may be best to stop and talk instead. Finding a mutual understanding and being sympathetic can lead to a practical solution that works for both parties, without having to go to court.
Another benefit of negotiation is that businesses can agree anything that works for them, though they should document it in writing. The agreed clauses do not have to be contained in the original contract and can be temporary. For example, if the supplier wants to suspend certain obligations for a period of time, this can be written up into an agreement, which states the suspension will end once lockdown is lifted. Negotiation, especially when guided by a professional, allows for businesses to come up with innovative solutions that suit everyone.
The way businesses respond now will shape existing contractual relationships, hopefully for the better. If an organisation is harsh and aggressive, in a time where being supportive is vital, then contracts might not be renewed. Most of all, businesses should be willing to be flexible and take the time to understand the situation fully before tackling any issues with an iron fist.