The disruption caused by the pandemic is putting a strain on many businesses, which will need to consider how their businesses and contracts work now and in the future. Some of the matters which need to be considered are discussed below.
A force majeure event is an event which does not exist at the time of the contract but which, if it happens, may disrupt the performance of the contract. Unlike some other jurisdictions, force majeure is not something which is automatically implied in a contract in English law. It has to be included in the contract. There are two key questions:
- What is a force majeure event?
- What are the consequences?
The type of event can be an event beyond the control of both or individual parties and may list examples which may or may include epidemics or pandemics.
The consequences may be that the contract can be suspended for a specified period without ending the contract, or that, after a period of suspension, the contract can be terminated or, for example, the party affected may go to another supplier until the event ceases.
As with force majeure, there is no right for a party to suspend performance of a contract unless the contract specifically includes such a right. Again, the contract will need to say in what circumstances a contract can be suspended.
A contract can be said to be frustrated if performance is impossible, or if the purpose of the contract has been frustrated. This is a difficult thing to prove, and the Courts in England have always set a very high bar so it is unlikely that frustration will apply in most cases.
Contracts can often be terminated by reason of a breach which is not made good. However, unless the contract specifies what events can lead to termination and what notice needs to be given, a contract can only be terminated for good cause and then only after giving reasonable notice. Care is needed if you purport to terminate a contract, as if you do so when not entitled to, you risk committing a repudiatory breach of the contract. i.e. claiming a contract can properly be terminated when this is not the case.
Limitations and exclusions of liability
If by reason of COVID-19 you are unable to perform your side of a contract, you need to consider the effects of that and whether your liability is capable of being properly limited or excluded. Again, this will depend on what the contract says. If there is nothing, you may be exposed to claims for damages, for losses suffered by a customer and, possibly, third party losses. If you do have an exclusion or limitation clause, it can only be enforced if it is reasonable.
Many contracts will not have anticipated the situation we are in now. Litigation and insolvencies will inevitably follow, although it is to be hoped that in many cases the parties will be able to discuss and agree how to deal with their existing contracts. We have been involved already in advising about a number of contracts which have been affected by COVID-19.
As some relaxation of lockdown approaches, businesses need to review the terms on which they contract in future given the risks. For example:
- New spikes in infection which may lead to any relaxation of the lockdown being revoked or amended.
- Production may be limited because of social distancing at work.
- The supply of raw materials being disrupted, delayed or made more expensive.
- Time limits need to be extended
- How COVID-19 will affect your reliance on foreign goods or services.
Many pre-COVID-19 contracts may not be “COVID proof”. All businesses need to review their terms of business to consider how those terms should be adjusted to take account of the different conditions which are likely to exist for some months or possibly years. Assuming you are in business for the foreseeable future, you should be looking to protect that business to ensure you limit your future liability relating to the COVID effect.
If you wish to discuss how your existing terms stand now, or how they should be amended to cover future business, contact Hugh Middlemass at email@example.com or call Winston Solicitors on0113 320 5000