Coronavirus (COVID-19) - FAQ's About Business Contracts
STEPHANIE CREASEY >
PartnerMon 30 March 2020
As the global outbreak of coronavirus (COVID-19) continues, many businesses are facing a period of growing uncertainty. Within our company commercial team, we have seen an increase in enquiries relating to fulfilment of contracts, termination of the same and what can be done to minimise risk exposure where contracts cannot be performed in full.
Depending on what your contract states, some businesses may find they are now able to be released from their contracts without penalty. Ultimately, it comes down to whether you have a written contract in place and what it says.
In order to help our business community understand their position, we have sought to provide some guidance to business owners on the most common questions we are being asked relating to contract fulfilment.
Can I bring my contract to an end because of COVID-19?
Generally, the legal position, is that those contracts which require ongoing performance are absolute and must be fulfilled. Any failure to perform may result in financial liabilities being incurred by the defaulting party for breach of contract.
If you, as a business owner, identify that resources are running low (be this due to staff absences or issues in the supply chain) you may want to consider whether you can terminate your contract before you find yourself in a position of breach and liable to pay damages.
Anyone wanting to terminate their contract will have to do so either in accordance with their contract provisions or, if there is no written agreement, on reasonable written notice. What is reasonable will be for the parties to decide and will be a question of fact based on the circumstances. COVID-19 is unlikely, by itself, to be a ground to terminate a contract.
If the contract is not terminated correctly and your business fails to perform its obligations, this will be treated as a breach.
There are two exceptions to this general position which may allow a business to be released from a contract without financial penalty. These are by inclusion of a ‘force majeure’ clause (which will only apply if there is a written contract in place) or reliance on a common law provision of frustration.
What should I look for in my contract or terms of business?
The key provision to look for is a “force majeure” clause. These clauses excuse one party’s performance under a contract if it is unable to perform its obligations as a result of specific events arising which are outside the control of the parties (these are the “force majeure” events). The events may include an epidemic or pandemic and any law or any action taken by a government or public authority.
In the current circumstances, it seems like the obvious position that a force majeure clause would be included as standard practice. However, this is often not the case as the provision is generic in nature and often overlooked, or even excluded, when contracts are drawn up hurriedly or without proper legal advice. If such a clause is included, it needs to be carefully drafted as many are often very broad and may not cover pandemics specifically.
In the absence of a force majeure clause, you may find your business is subject to a contract with punitive non-performance clauses. Any such clauses need to be reviewed to determine how the business could be affected if the contract cannot be fulfilled.
I don’t have any contracts or terms of business, or my contract doesn’t include a force majeure provision, what is my position?
If you don’t have written terms or your agreement lacks the relevant force majeure provision, you may be able to rely on principle of frustration.
Frustration is where a party is released from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract. It is a high bar to satisfy and the situations where it can be invoked are limited. Whether the current pandemic would fall into this category or not will depend on the individual circumstances and obligations under a particular contract.
A contract will not be frustrated simply because it has become more difficult or expensive for a party to comply with its obligations. It is possible that in the current coronavirus situation the bar may be reached now that there is a government imposed lock-down, but it is unclear whether other situations would meet the bar e.g. if a business decides not to continue with the contract because of staff shortages but is excluded from the lock-down provisions.
If frustration can be relied on, then generally the party not in default would be able to recover any monies paid under the contract before it was terminated, subject to an allowance for expenses incurred by the party who is unable to perform their obligations.
The fact that frustration may be available, won’t necessarily lead to an automatic release from any failure to perform a contract – a business will need to show it has taken appropriate steps to minimise the risk of breaching the contract and implemented a communication plan with its suppliers/customers at any early stage.
What about business insurances, will these cover losses incurred as a result of the impact of the virus?
We recommend that businesses check their insurance provisions at the earliest opportunity to see if they have cover for business interruption and loss of income. You should also speak to your insurers for further guidance.
It is unlikely that the virus itself will be specifically covered, but such events may be covered within a general policy on a broad basis e.g. for interruption for non-physical events. Business owners will need to look at their individual policies to work out what the triggers for their insurance to pay out are and any exclusions that might apply.
In some circumstances, business may be required to take out insurance for the duration of specific contracts and these will need to be reviewed to ensure that adequate cover is in place.
Businesses may have insurance to cover business interruption or the death or incapacity of key individuals (keyman insurance) within the business. However, these may have a high threshold or not provide cover in the event of a pandemic. Some policies may also have limited cover or certain exclusions. Given the current state of the global financial markets during the ongoing pandemic, obtaining these insurances now may not be possible or extremely expensive.
What can I do now to protect my business and plan ahead?
Businesses can take certain steps now to try to reduce and offset the effect of coronavirus on their contractual arrangements. The key things you can do now to put yourself into a good position are:
- Put in place business continuity procedures which should be regularly monitored, updated and tested as a matter of best practice as the pandemic continues. Such procedures should align with advice from the government and any relevant trade or governing bodies.
- Review contracts and agreements with customers and suppliers to identify if force majeure provisions are included. If not, you may need to consider putting new contracts in place which include the relevant provisions (if you can) or look at what the notice provisions are if you need to cancel the contract to avoid any breach arising for non-performance.
- Consider what pre-emptive measures you can take now such as stock piling materials, postponing events/deadlines by consent, assessing assets and liabilities on an ongoing basis and making alternative staff working arrangements.
- Establish effective lines of communication with all relevant parties to discuss how to minimise any disruption. This should include staff, suppliers and customers.
- Check your business insurance provisions to see if you have cover for business interruption and loss of income.
If you would like a review of your business contracts or require further advice on any issues within this article, please do not hesitate to contact our Company and Commercial team on 01733 333333.
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