COVID-19 – Advice for Suppliers and Customers
What if you are unable to meet your contractual commitments and/or want to cancel?
We are receiving many queries from our clients about what to do in relation to their contractual commitments in a variety of service sectors including leisure, travel and events management. Understandably many suppliers are concerned about what to do if they are unable to meet their agreed commitments and customers are also considering their termination/cancellation options. Although this will depend on the precise terms of each contract, there are various things that you can consider when looking at your options. As these are unprecedented times and the government advice on the situation keeps developing, your options may change over time:
- Communication – it is important that you maintain effective communication with the other party about the current situation and the likely affect this could have on the contract. Maintaining a good working relationship and being pro-active will help with goodwill on both sides during discussions on potentially difficult issues.
- Variation – even written contracts can often be varied by mutual agreement. Whilst this will depend on the relationship between the parties and your respective bargaining power, you may be able to agree a new timescale for deliverables, a postponement or re-booking on a different date. It is important that your new agreement is documented appropriately in line with any variation requirements in the contract. Often, variations are required to be in writing and signed by both parties or there is a formal variation procedure to follow. It is important that the requirements of the contract are met to avoid any uncertainty down the line about what was agreed.
- Force Majeure – there may a force majeure clause in the contract which you could seek to rely on. Force majeure means “superior force” and is sometimes still referred to as “an act of God”. The purpose of a force majeure clause is to excuse a party from performing its obligations where they are prevented from doing so due to something beyond their reasonable control and provides certainty of the outcome in these circumstances. Whether your force majeure clause will cover COVID-19 will very much depend on how the clause is drafted. A word of caution – it is risky to claim force majeure in anticipation where your contract deliverable is a few weeks or months away – the timing of when you should seek to claim relief is crucial.
Where you are seeking to rely on the force majeure clause, you need to ensure that any notice requirements are complied with. The consequences of force majeure usually depend on how long the event goes on for but there is often an ultimate right of termination. Whether any compensation is due on termination will depend on the specifics of the contract – force majeure can sometimes be considered to be non-fault termination event. It is unlikely that any existing contracts will refer to COVID-19 specifically but you should consider looking at your standard terms and conditions and any new contracts you are considering entering into now as to how to incorporate appropriate terms that would cover this sort of situation in the future.
- Frustration – where your contract is silent on force majeure or you are unbale to rely on a force majeure clause, the doctrine of frustration may apply. A party may be relieved from their obligations where something happens after the contract was entered into which makes it physically impossible to continue to perform the contract or illegal to do so or would render performance radically different from that envisaged by the parties when they entered into the contract. This is a difficult rule to rely on as the Courts take a very limited view of what amounts to frustration but it is still worth considering. Where frustration can be claimed, the contract is deemed terminated at the point it was frustrated so each party is relieved from any future obligations. Any obligations which have accrued up to this point remain enforceable. Where the legislation governing the consequences of frustration applies, it may entitle a party who paid prior to the frustrating event to be repaid by the other party although the other party may be entitled to retain some of the payment for their expenses.
- Termination – it is worth reviewing the termination provisions of your contract to understand your ability and the other party’s ability to get out of it due to the on-going situation. Unfortunately for some, the insolvency termination provisions may come into play here. You need to be careful about seeking to terminate for insolvency or breach to ensure you really do have the right to terminate – if you terminate when you do not have the right to (a “repudiatory breach”), this entitles the other party to either accept or reject the termination and to claim damages in either event if the other party suffers a loss.
It is also important to understand the relationship between any breach provisions and the force majeure provisions (if any) in the contract as the purpose of claiming a force majeure event is to prevent the other party claiming breach. In addition and much easier to enforce, your contract may allow for a unilateral right of termination on notice for no reason (with or without an agreed level of compensation).
- Insurance – it is also worth reviewing your insurance policies to see whether there is any right to make a claim and to be clear on if and when your insurance company will pay out. Again, this will very much depend on the terms of the policy. It is advisable to seek written confirmation from your insurance company or insurance broker but also to satisfy yourself of the cover provided in accordance with the policy wording. “Corona virus” and “Covid-19” will not appear in the wording unless the policy was very recently written, so words like “notifiable disease”, “epidemic” and “pandemic” are likely to be key. If you are unsure of your position, it is advisable to seek an independent view on this. It will also depend on Government actions over the coming weeks as changes to advice and potential bans or prohibitions could also affect insurance policies.