Meeting contractual obligations : It goes without saying, COVID-19 is having a huge, unprecedented impact on businesses of all sizes. Regardless of where your business is in the supply chain, you may already be experiencing the effects; not receiving orders, unable to hit deadlines, non-payment, which subsequently exposes you to the knock-on effects of not being able to pay invoices or even staff. What can you do?
It is common for contracts to contain a ‘force majeure’ clause, which sets out what the parties can do if unforeseen events happen that are out of their control. This clause will usually allow a party to suspend performance of the contract for an agreed period of time (say, a few months) without penalty, until the unforeseen event in question has passed. If the events persist, in some cases, the clause may allow the parties to end the contract without meeting contractual obligations any further.
However, as many have already experienced (to their detriment), COVID-19 may not be included as a force majeure event. Many force majeure clauses include a long list of trigger events, which are historically seen as ‘acts of God’, such as earthquakes, hurricanes, floods etc. Pandemics and epidemics may not be included. Other clauses may simply avoid listing specific events and therefore will be subject to interpretation.
The fundamental question is whether the event is completely beyond the control of the parties. The clause may also state whether the event has to actually prevent a party from carrying out its obligations or just hinder or delay. If the latter, how significant a hindrance or delay is required is open to interpretation.
If you are lucky and COVID-19 is covered, you may be able to rely on the clause to postpone performance of your obligations. However, you still need to be able to show you have taken reasonable action to mitigate the effects. You also still need to comply with the other requirements in the contract, such as notifying the other party in the correct way with the right notice period.
If you cannot rely on force majeure, in certain circumstances you may still be able to claim the contract has been ‘frustrated’ and brought to an end. A frustrated contract is a contract that, subsequent to its formation, and without fault of either party, is incapable of being performed due to an unforeseen event. If it simply becomes harder or your costs rise but you can still do what you contracted to do, the contract won’t be frustrated, and you won’t be discharged from your obligations. COVID-19 probably won’t ‘frustrate’ many contracts, but it will depend on your specific circumstances, for example, the current lock-down enforced by the UK government may be enough.
If you cannot rely on either of the above, it is worth checking whether the contract contains any other clauses that may help you – for example, you may have a right to terminate the contract on short notice. In this eventuality, you may still be bound to meeting contractual obligations up to the date of termination, but it may be economically sensible to cut your losses and therefore worth the commercial risk.
Failing that, you could always try talking to the other party to come to an agreement. As stated above, COVID-19 is having a huge impact on businesses of all sizes and therefore it is in everyone’s interest to work together to minimise any loss.
For more information about Meeting Contractual Obligations, contact our Corporate and Commercial Legal Team
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700