By Steve Allen, Head of Birmingham office and Partner in commercial litigation and arbitration, Mills & Reeve
In the face of the COVID-19 pandemic, businesses are contending with a multitude of issues – a major one being whether or not to continue trading.Most trading relationships are governed by complex contractual arrangements, yet in the current climate, it may be that either your business or your customer’s business is no longer be able to meet their obligations.Assuming that the pandemic will automatically entitle you to walk away from a contract is wrong and may result in your business facing litigation or arbitration – less than ideal in cash-strapped and challenging times. If this is the case, what are your rights?Force majeure clausesOften, contracts contain a clause which sets out what will happen if an event occurs beyond the control of the parties involved, such as the COVID-19 outbreak. These are known as ‘force majeure’ clauses. These clauses may be specific and list events which all parties agree will impact on the performance or terms of the contract. However, they may be written in more general terms which make their interpretation problematic. As a prime example, many of these clauses will not mention the word ‘pandemic’ and the party that wants to rely on it will have the burden in law of demonstrating that the circumstances meet its terms.It’s also important to note that while some sectors have been negatively impacted by the UK government’s lockdown, others have not and are able to carry on operating, and in some cases have seen demand surge. This is particularly the case across the health, food and agriculture sectors. If your contractual relationship is within one of these sectors, relying on a force majeure clause may be difficult.There may also be notice provisions within your contract which means that communications with the other party may have to be given in a particular way or within a specific time frame to be valid.The impact of force majeure clauses depends on the nuances of the contract. The clause may not allow automatic termination of the contract, but instead suspend the need to perform or excuse liability for non-performance.Termination of the contract by frustrationAnother way you can negotiate your commercial contracts in light of COVID-19 is appealing to frustration. This is a legal device external to the contract, whereby it can be set aside if an unforeseen event renders obligations impossible to fulfil or radically changes parties’ purposes for entering into the contract.If the court finds that the effect of COVID-19 has resulted in the frustration of the contract, then it will discharge it. This will relieve parties of their rights and obligations in the trading arrangement. This situation arises where the very purpose of the contract has been frustrated by the impact of the events outside of the parties’ control, leaving it impossible for the businesses to continue performing their role. In relation to COVID-19, this may include the fact that the lockdown has prevented the supply of essential raw materials, or there being insufficient staff available to work. However, if there is already an express force majeure clause in the contract, frustration is unlikely to hold much weight.Even if the contract is determined to be discharged by frustration, this doesn’t mean that the non-performing party will not have a claim made against it. The Law Reform (Frustrated Contracts) Act 1943 provides for the recovery of both money paid before the contract was discharged and the recovery of non-money benefits such as plant and machinery, which may have been provided in order for the contract to be performed. In other words, the party struggling to meet their side of the bargain may have to reimburse the other business to an extent further down the line.Other considerationsYou should also check to see whether your contract may contain a ‘material change of circumstances’ clause allowing a party to walk away from their obligations. However, these clauses are uncommon and in many cases narrowly defined.A contract may also be discharged if its performance is illegal under English law. Currently, it is unlikely that many contracts will fall within this category. However, this should be kept under review if the government tightens its COVID-19 strategy going forward.Contracts governed by foreign law will be subject to alternative considerations under international conventions.It may well be possible to agree the way forward with the other party, but often a variation in the contract will be required to be formalised in writing and signed by both parties. It’s important that any variation is drafted carefully, in order to ensure that you are not storing up problems for the future.Don’t assumeIt is important that you weigh your options up carefully, and do not assume that COVID-19 will allow the suspension or discharge of your or your customer’s obligations under a contract.You should obtain legal advice as soon as possible in order to ensure that any important time limits in the contract are not missed. This will also ensure you are properly informed of your rights and obligations under the contract.