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5 considerations for commercial contracts during Covid-19

Reviewing your contractual relationships during these unprecedented times?

Is it getting more difficult or costly to perform your contractual obligations during the coronavirus crisis? Do you need help to re-examine your contractual relationships to establish what options you have to pause a contract, re-negotiate or even terminate?

This article covers 5 points to consider before you take any action:

  1. Have a commercial conversation with the other party

During these unprecedented times, the other party may be more sympathetic to your supply chain or personnel issues. It may be that they too are having issues and may not be able to perform their obligations under the contract and the best outcome would be to re-negotiate the terms. A commercial discussion can go a long way and we are here to help you re-negotiate.

  1. Consider force majeure

This is a contractual clause which alters parties’ obligations under a contract when an extraordinary event or circumstance beyond their control prevents one or all of parties from fulfilling those obligations.

To benefit from a force majeure clause, your contract must expressly address it as there is not an implied term of force majeure under English Law. Depending upon how the clause has been drafted, you may benefit from the performance of your obligations being excused either entirely, or for the duration of the force majeure event.

If you are looking to claim force majeure then it is your responsibility to demonstrate that a force majeure event as defined in the contract has occurred.

It is important to take legal advice and guidance in relation to your force majeure provision before taking action to ensure that you are not risking your business breaching contractual terms.

  1. Is the contract ‘frustrated’?

Frustration applies when:

an event arises that is unexpected and beyond the control of the parties which makes it physically or commercially impossible to fulfil a fundamental obligation under contract, or transforms the obligation in to something which is radically different from what was contemplated.

Where a contract has been frustrated, a party could be excused from all future contractual obligations and the contract terminated. Where a contract is ended for frustration, you will usually be able to recover sums paid for performance of the future obligations, less expenses already incurred by the other party in preparation of performance.

Relying on frustration can be difficult as there are restrictions:

  • You cannot claim frustration simply because the contract is more difficult to perform, or it has become economically unviable.
  • You will be unlikely to claim a contract has been frustrated where you are aware of a frustrating event at the time the contract was formed.
  • You cannot claim frustration where a remedy already exists in the contract which deals with the circumstances which have arisen.
  • Relief will not be available under frustration where it is self-induced.

If you think your contract is impossible to perform, please get in contact by email or phone before taking any further action. We are currently helping businesses in this situation, resolving uncertainty, advising them where they legally stand, and what their next steps could be.

  1. Has performance of the contract become illegal?

Has the introduction of new legislation rendered your obligations under the contract illegal? Would your performance of the contract break the law? Illegality could help release you from a contract where performance of the obligations has become illegal. You will not be able to claim that performance is illegal simply because performing your obligations has become more difficult or uneconomic.

Illegality is a complex legal concept and professional advice should be sought before taking any action.

  1. Do not rush to terminate your contract

Wrongly terminating your contract or serving notice to terminate when you don’t have the right to do so could be a repudiatory breach, serious enough that you could be liable for damages. Even if you do have the right to end the contract, is this something that you really want to do? Severing commercial relationships could be detrimental to your business once the pandemic has passed.

If you had never thought about terminating the contract before the pandemic, don’t jump to end it now.

If you think that terminating your contract is the only route, please contact us before doing so. We can work with you to either consider law your other options, or make sure the contract is ended using the correct procedures.

How can HM help?

  • If you would like to discuss the effects of Covid-19 on your contracts, please get in contact with one of our specialists. Our commercial law team is responsive and highly experienced.
  • Assisting in preparing your management information and cash flow forecasting which your lender will require.
  • Delivering advice on the Covid-19 loan agreement, completing any necessary documentation in a matter of days. Here are details of UK Government coronavirus support.
  • We can also provide guidance on directors’ duties and insolvency.

You can be reassured that our working capabilities have been unaffected by the lock down due to our recent six-figure investment in systems and infrastructure. This is allowing our team to work remotely, delivering the service our clients need, when they need it.

Thank you to the author: Lauren Swanick

Contact us for a free, no-obligation discussion about your situation:

E: [email protected]

T: 01244 318131