It is an alarming and uncertain time and commercial contracts of every type are being affected. However, there are steps that all businesses can take to better understand and protect their contractual position, as well as practical ways to mitigate the impact of coronavirus and avoid disputes.
What do your contracts say?
You should be looking at your contractual rights and obligations. The particular terms of contracts will vary. These terms will have an impact on how you approach other parties to try and resolve issues that arise.
Cancellation or termination clauses will provide for circumstances in which parties can be released from their obligations. They may, however, provide for specific events and/or notice periods which mean it is not possible or practical to seek to rely on them. However, there are other clauses which might be included and which can help.
Force Majeure Clauses
A force majeure event is one that is unavoidable, and not the result of either party's actions. It is an event which makes it impossible for at least one party to perform the contract. If your contract has a force majeure clause, upon the happening of a specified event it may allow one or more party to cancel the contract, in whole or in part, or suspend performance or to claim an extension of time.
Given the unique nature of Covid-19, existing contracts are unlikely to specifically refer to coronavirus, but may well refer to an epidemic, pandemic, or contagious disease. They may also refer to actions by government agencies or work stoppages, all of which may be relevant.
Whether or not the impact of Covid-19 would qualify as a force majeure event will depend upon the precise wording of the clause, e.g. under the clause can it properly be said to amount to an "event" at all? Indeed, under the clause does the triggering event "prevent" performance or merely "hinder" or "delay" it? The burden of proof, that is the responsibility to establish the argument, will be on the party trying to rely on the force majeure clause, who must prove that the virus falls within the wording and that non-performance of the contract is inevitable and really is due to that event.
A force majeure clause will also usually require the party seeking to rely on it to show that it has used its reasonable endeavours to mitigate the effects of the force majeure. Put simply, has the party who is trying to rely on the clause taken reasonable steps to avoid the consequences?
Consumer Contracts and force majeure
In a consumer contract made on or after 1 October 2015, the Consumer Rights Act 2015 will apply and the clause will need to satisfy criteria of fairness and transparency. That may be helpful for those trying to find a way out of obligations, less so for those seeking to enforce them. A strict interpretation of the provisions will be important.
Material Adverse Change/ Material Adverse Effect Clauses
Used frequently in share purchase agreements and financing commitments, these clauses are less common in other business contracts but it is possible they may be available to parties where they do appear. The clauses are designed to cover unpredictable and unforeseen events or circumstances, and to allow a party to withdraw from agreements where there has been a material adverse change.
What qualifies as a material adverse change varies, but for example a loan agreement may refer to material adverse changes in the business, operations, property, financial condition or prospects of the borrower, or changes in the national or international financial markets. Where that takes a party, whether the consequences are helpful, and what arguments will need to be employed to address this, may well turn on what hat that party is wearing and the party's objectives.
Consideration will need to be given to the legal doctrine of frustration.
A contract may be discharged on the ground of frustration when something happens which significantly changes the nature of the outstanding contractual rights and obligations from where the parties could reasonably have expected to be at the time the contract was made. If it does then it might well be unjust to hold the parties to those obligations.
A change in the law leading to the cancellation of an event is a typical example of where frustration might apply. That could be highly relevant in the current climate. However, it should be noted that the court will not invoke frustration lightly. Simple hardship or financial loss involved in performance might not be sufficient without more where performance is still possible. There are also rules seeking to prevent any party being unjustly enriched (inappropriately rewarded) when frustration occurs. In the end the outcome is likely to depend upon the terms of the contract and the specific facts involved – and good legal argument.
Whilst it is being reported than many businesses, particular smaller businesses, will not have insurance cover for something like Covid-19, it is important to check the wording of any applicable policies which will vary greatly. Such policies, if applicable, will have notification clauses which must be observed. Insurers need to deal carefully with every claim, not least in the present climate. A simple insurance rejection is not though inevitably the end of the matter, and if appropriately persuaded, insurers will reconsider.
On 17 March the chancellor announced the first part of a revised fiscal response to help businesses and the self-employed. The initial package is set to include £330 billion of government backed loans to be available to all businesses and £20 billion in the form of grants and tax breaks. The latter includes small business grant funding of £10,000 for all businesses in receipt of small business rate relief or rural rate relief and grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000.
The government is also introducing a 12-month business rates holiday for all retail, hospitality and leisure businesses in England.
Taking a commercial approach and making informed decisions
Inevitably in the crisis desperate measures may call for desperate action, but addressing this by calmly identifying rights and obligations will be valuable as parties decide how to proceed. That may though only be the starting point for businesses. It might well be sensible for businesses to take a commercial and pragmatic approach to the issues arising as a result of Covid-19. Trying to anticipate potential problems before they arise and addressing them with other parties in order to try and find mutually acceptable solutions that avoid deadlock or litigation will always be best if it's possible.
Practical considerations for businesses
We will be providing further guidance on contracts and how best to manage numerous scenarios arising as a result of Covid-19 as further developments occur.
Further crisis related resources already available on our website include:
- Employer FAQS including health and safety requirements, eligibility for sick pay and how to manage and support employees needing to work from home and self-isolate here;
- Guidance on managing board meetings and decision making where face to face meetings are not possible here;
- Issues arising for commercial landlords, tenants and developers here, here and here; and
- Information on FRC guidance on coronavirus disclosures and audit issues here.