Understanding commercial contracts during COVID-19

At Simplyhealth, we work with a variety of businesses, from small and medium sized enterprises, such as dental and veterinary practices, to large corporate partners. We understand the importance of keeping up to date with correct and relevant information and the value of guidance, support and advice. In collaboration with our legal partner, Knights PLC, we’ve put together a suite of business resources to help you through this challenging time.

Jonathan Finney, a solicitor at Knights PLC, our legal partner, discusses how the coronavirus (COVID-19) pandemic is impacting commercial contracts and sets out some practical steps you can take now to prepare and hopefully minimise any disruption.

1. How is the COVID-19 pandemic impacting commercial contracts?

We are seeing an increased demand for advice on terminating contracts, any consequent liability arising as a result of such termination, whether COVID-19 is a “force majeure” event, and on whether a contract has been “frustrated”. 

2. Does the COVID-19 situation automatically excuse a party’s performance of its contractual obligations and/or bring the contract to an end?

In short, no. While the COVID-19 emergency may be unprecedented, the parties must continue to operate the contract properly and comply with their obligations relevant to the on-going situation. Otherwise, this may pre-empt a party from obtaining the relief or remedy it seeks.

3. So what should I be looking for in the contract?

Most contracts will include a “force majeure” clause. Such a clause anticipates that there may be some sort of ensuing event beyond the control of the parties. This event may affect the performance of a contract. And it could provide contractual relief for one or both parties from obligations as a result.

While the contract may include a force majeure clause, the exact wording needs to be assessed to check whether: (a) it covers the COVID-19 pandemic (e.g. by expressly referring to “pandemics”); and, if so; (b) whether performance may now be excused, suspended, or ended. This is not a straightforward issue and it depends on two things. The first being the interpretation of the clause in the context of your contract. And the second being its application to the facts of your case.

4. What if there is no force majeure clause?

The common law doctrine of “frustration” may apply. 

In short, if, as a result of the coronavirus pandemic, performance of the contract has become legally or physically impossible through no fault of the parties, the contract may be frustrated (note, however, that frustration is rare and difficult to successfully argue). A frustrated contract ends automatically and immediately, without any action by the parties, who then have only limited rights to redress.

5. What if neither force majeure nor frustration are applicable?

There may be other provisions in the contract which allow for the suspension of a party’s performance of the contract or termination by either party. Alternatively, there may have been a breach of contract that, depending upon the severity of that breach, entitles a party to bring the contract to an end.

6. Any other tips?

(a) Negotiate with the other party

If it’s looking likely that you’ll be unable to perform your obligations under a contract, it may be worth simply getting in touch with the other party. 

Regardless of what the contract says, you may well be able to come to an agreement that works for both of you. You could offer to delay performance of the contract to a later date. Be sure to evidence anything that has been agreed with the party in writing.

(b) Consider updating your contracts/standard terms and conditions

Perhaps you’ve been stung by a force majeure clause (or lack thereof!) as a result of the COVID-19 outbreak and want to avoid this situation in the future. Or perhaps you are negotiating a new contract and want to limit your liability if you are unable to perform your obligations under it due to the virus. It is arguably more important than ever to ensure that your contracts are robust.

(c) Check your insurance

A business that suffers a loss as a result of disruption arising from COVID-19 should review its insurance to determine if it has cover.

(d) Be mindful of government guidance and instructions

Ultimately, the safety, health, and well-being of your employees, customers, and the general public must remain the absolute priority. This may mean that changes to working practices may be required to continue trading.

Questions or concerns?

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