Coronavirus: The impact on meeting your contractual obligations

These are challenging times. COVID-19 is having a huge impact on many of us personally, and also on businesses of all sizes. Wherever your business sits in the supply chain, you may well be feeling the squeeze: perhaps not receiving orders, or unable to fulfil orders, leading to non-payment and exposing you to the knock-on effects of not being able to pay invoices or even staff. The increasingly parlous state of the airline industry is a stark example.

So, if you are struggling to meet your contractual obligations or think you may struggle in the near future, what can you do?

Force Majeure

The first thing to do is check your contract. There may be a ‘force majeure’ clause setting out what the parties can do if unforeseen events happen that are out of their control and mean at least one party can no longer meet its contractual obligations. This clause will usually allow a party to suspend performance of the contract for an agreed period of time (say, a few months) without any penalty, until the events in question have passed and normal service can be resumed. If the events persist, the clause may allow the parties to end the contract without having to meet any further obligations.

However, the devil is in the detail. You’ll need to check that the impact of coronavirus is included as a force majeure event that will trigger the clause. Many force majeure clauses include a long list of trigger events, and ‘pandemics’, ‘epidemics’ or similar may be in there alongside earthquakes, ‘acts of God’, etc. Other clauses may avoid listing specific events so as not to be considered to exclude anything not listed.

The key aspect of a force majeure event is that it is completely beyond the control of the parties to the contract. The clause may also stipulate whether the event has to actually prevent a party from carrying out its obligations or just hinder or delay (for example, to supply particular goods or services at a particular location). If the latter, how significant a hindrance or delay is required for the clause to be triggered? If your contract has a force majeure clause but you’re not sure whether coronavirus is covered, seek legal advice.

If coronavirus is covered and you would like to rely on the clause to postpone performance of your obligations, remember that you still need to be able to show you have taken reasonable action to mitigate the effects of the force majeure event on your business. Finally, you need to let the other party know. Make sure you comply with the requirements in the contract for notifying the other party in the right way with the right notice period – and ideally get their acknowledgement – before you ‘down tools’.

Frustration

Even if you can’t invoke a force majeure clause, in certain circumstances you may still be able to claim the contract has been ‘frustrated’ and brought to an end. You would usually need to show that events have made it completely impossible to carry out your obligations or have radically changed the purpose of the contract. If it just 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. Coronavirus probably won’t represent grounds for frustration in most cases, but it will depend on your specific circumstances. A lock-down enforced by the government may be enough. Again, it would be worth seeking legal advice.

Other Options

If you cannot rely on force majeure or frustration, it is worth checking the contract for other clauses that may help you. For example, you may have a right to terminate the contract at short notice ‘for convenience’ (i.e. absent any breach by the other party). You could still be bound to meet your obligations up to the date of termination but it may be economically sensible to cut your losses.

Failing that, you could always try simply talking to the other party and reasoning with them. Given the current extraordinary circumstances, you may find they are willing to agree to an extended delivery period, for example, or to a staged payment plan.

These are challenging times but with the impact increasingly universal, it is arguably incumbent on all businesses to cooperate to find a commercially viable path through the disruption.

For further advice on meeting your contractual obligations, please contact Jon via the below details.