By Diane Yarrow, Partner in the corporate and commercial team at Gardner Leader
The biggest challenge companies currently face is the financial impact that the coronavirus pandemic will have upon their business. A key consideration of this is the understanding of the various commercial contracts held within the business and to what extent the outbreak could excuse them or their counterparties from their contractual obligations.
Every company will have a range of commercial contracts, which will differ from business to business and sector to sector. For example, you may hold agreements for licensing and franchise, loan and finance and supply of goods and services or for shareholders and joint ventures.
Now more than ever is a good time to carefully revisit the terms of your contracts with partners, suppliers and customers, to understand what obligations may be affected or disrupted, or where possible, terms could be renegotiated to help your business through the challenging times ahead.
The supply chain
Check which areas of your business could be impacted the most, considering all points in the supply chain which could affect your contractual obligations. For example, could border shutdowns or fulfilment issues interrupt the normal supply of goods or services to your customers? If this is the case, consider whether you can find alternative sources of supply at short notice and if this is permitted in your current contractual arrangements.
Can you renegotiate terms with your suppliers and customers to try and find transitional arrangements to deal with any delays caused by coronavirus or renegotiate on payment or terms to help your cash flow? For instance, look to agree revised dates for performance and delivery (the contractual term for services or goods provided to meet customer expectations). Could delivery for goods and services be provided outside normal working hours? Also look at forward planning – can you get ahead of timescale by bulk ordering items, so your business is not affected?
Check if there is a force majeure clause, sometimes referred to as “acts of God,” “exceptions” or “unforeseen events.” This essentially provides relief from the obligations in the contract when an extraordinary event or circumstance arises which is beyond the control of the parties and prevents one or both parties from complying with their obligations in the contract.
If there is a clause, it’s crucial to check the exact language to determine whether there is a basis for construing the clause as including the coronavirus, as the concept of force majeure will not be implied into a contract.
The scope of a force majeure clause will be different from contract to contract and you should not assume that they are the same. What is considered to be outside your control will depend on the wording and the specific list of events included (which may or may not include pandemics), so each contract should be reviewed and considered separately.
Keep an eye out for express wording to “pandemic”, “epidemic”, or something similar. You may also see reference to more provisional events, such as labour and supply shortages which could easily be experienced during the coronavirus pandemic. Finally, there may even be a catch all provision referring to “any other event beyond the control of either party” which could provide relief depending on the circumstances.
As well as checking what is included, clauses like these can sometimes set out events which will not be “outside the control” of the parties to the contract, so check whether the clause has any specific exclusions. It would be unusual for a pandemic to be excluded, but do check.
Other contractual considerations
Damages: if you’re struggling to meet the terms and conditions of your contract due to coronavirus restrictions then check if there are specific clauses in the contract which cover damages for breach of contract. In general, a party has a right to damages if there is a breach of contract, subject to certain limits. At a basic level, loss is limited to that which arises in the ordinary course of business or within special circumstances known to the parties. If this is the case, address the restrictions with your customer at the earliest possible moment, explaining the potential impact this could have on your service, and work with them on a solution so they can make provisions to limit the impact on their business.
Termination rights: would the potential breach of a term be one which will provide a party with a right to terminate the contract? There might be an express right to terminate or, if not, there might be an implied right because of the nature of the clause or statute. Again, speaking to them early will help set expectations and be less likely to terminate the contract.
Frustration: there is the potential opportunity to transform your contractual obligation to perform into a radically different obligation under “Frustration”. English law states that a contract may be discharged for frustration where something occurs after the formation of the contract that makes it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation.
Limitation on Liability: if a customer seeks to make a damage claim suffered as a result of your non-performance of the agreement, then it is vital to review your exposure under any agreements. Check whether there is a cap on your liability and if there are exclusions for consequential and indirect loss as this could protect your business financially.
Dispute Resolution: look for a positive way for both parties to reach an agreeable resolution concerning a claim without the need to go to court. A dispute resolution procedure clause can help to maintain good commercial relationship between the parties, and can save significant amounts of time and money, when compared with litigation or arbitration.
Write everything down
During this time, it is prudent to keep accurate and detailed records of events and any third party discussions. Facts are crucial to establishing or defending a claim and can make all the difference to the outcome.
Use any business “downtime” to consider your business model, review your general contractual terms and conditions, or potential acquisitions or joint ventures that may help protect or even grow your business.
Taking the time to better understand your business and its contracts now will help you survive the road ahead and come out the other side intact.