Enforceability of Commercial Contracts (COVID-19)

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Many businesses today are struggling to cope with the pressures of the COVID-19 outbreak. As well as causing unprecedented health difficulties it is also giving rise to huge economic problems around the world.  These will in turn give rise to many legal disputes.

The outbreak will have caused huge problems for supply chains being unable to manufacture or produce goods, due to a lack of workers as staff adhere to the strict quarantine measures imposed by government to contain the virus. This inevitably will result in businesses being unable fulfil contracts to supply goods or services.

The question arises as to whether a party is able to cancel the contract and whether damages would be available as a result.

Under English law, there are two potential contractual methods of escaping liability for breach of contract. These are Force Majeure and Frustration. It is important to understand that these two concepts are completely different and operate independently.

Force Majeure operates as a specific express term in the contract, which tends to identify events and circumstances, which if they occur, would entitle the party to serve notice that the event is one which is beyond their control.

The Force Majeure clause in the contract will outline what has been agreed between both parties, such as:

– the events which will entitle either party to declare a Force Majeure

– how a party should notify the other of a Force Majeure event

– how to deal with the consequences which flow from declaring a Force Majeure.

However, as in all legal issues, the devil will be in the details

It is highly likely that government will issue Force Majeure certificates to assist businesses seeking to rely on the clause. However, contracting parties will still need to agree, as if not the courts will have to determine whether a Force Majeure event has occurred and also, very importantly, whether a party has effectively taken the necessary steps to mitigate the loss.

It is important to note that when agreeing a Force Majeure clause, parties can also agree the consequences which might follow such an event, including whether contractual obligations are suspended, whether liability accrues or is capped and rights on termination.

Frustration is entirely different to Force Majeure. Frustration relies on a party to prove that, as a result of the outbreak, it has become simply impossible to fulfil the contract. This will of course give rise to examination of the particular facts of each situation which is bound to centre on the argument of what was possible as opposed what was impossible.

Businesses seeking to rely on these contractual methods of escaping liability during this current pandemic, will still find it is going to be quite difficult to prove. If a business does seek to rely one of these methods incorrectly, then the other party may argue that assertion has of itself has given rise to a breach of the contract. This could give the other party a right to claim damages or even treat the contract as terminated.

The government has taken and is continuing to take significant steps, in offering financial support across the economy to assist in these difficult times. It seems that there is a likelihood that businesses may be forced into delaying payment for goods or services. Companies should be aware that this might attract interest under the terms of the contract, as well as a statutory right to interest under The Late Payment of Commercial Debts (Interest) Act 1998. However, businesses will be acutely aware that if a company is put into some form of insolvency, there more often than not, very little dividend. It therefore seems that businesses are going to have to be realistic in this difficult time and renegotiate terms.

It would be advisable, where you have contracts of any significant size, for any extensions or variation of terms to be expressly agreed in writing between both parties, so that there is clear evidence as to what terms have been altered and what has actually been agreed.

In terms of court proceedings, whilst there may be some latitude on the deadline for issuing proceedings, where a limitation deadline is in place, there will have to be clear evidence that a representative was unable comply with the relevant timetimes. Once proceedings begin, there is likely to be a delay to comply with any directions but again this will require evidence. The high court in particular is encouraging parties to communicate by telephone or potentially by video link where possible.

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Ian Pearl
Partner - Litigation
(0)20 8349 5506
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Contentious Probate, Litigation
Posted in Blog, Commercial, Dispute Resolution.