Backhouse Jones Watermark

COVID-19 and the ongoing impact on your commercial contracts – Part 2

22 April

Further to Part 1 of this article which can be found here, below we list some frequently asked questions.

 

Is it force majeure if our supplier is still able to deliver but we don’t require their services as a result of Covid-19?

Force majeure clauses don’t normally automatically excuse both parties from all liability or bring the contract automatically to an end. Typically, a customer’s main obligation is to pay the contract price for the service (or goods) that the supplier provides, and they are also subject to an implied term that they will not actively prevent the supplier from carrying out its obligation. You therefore must consider:

  • Does Covid-19 prevent you from paying for the service?
  • Does Covid-19 prevent you from doing something that must be done before the supplier can provide the service? For example, the government has required you to close your premises, where the supplier needs access to your premises to provide the service.
  • Even if the supplier is still physically able to deliver the service or goods, is it legal for them to do so considering the lockdown restrictions?

The specific wording of the force majeure clause and the particular circumstances relating to the performance of the contract will need to be examined to determine whether you may claim any reliefs under force majeure.

 

We are a removals company. Can we rely on a force majeure clause if we are unable to perform the removal services due to Covid-19?

Removals services are covered under the Consumer Rights Act 2015 (CRA) and terms governing when services must be performed will generally form part of the contract.

The CRA provides remedies for breach of these terms and therefore a removals company may be able to limit, but cannot exclude, its liability for such a breach.

Any contract terms which attempt to prevent or discourage a customer from exercising their statutory rights are also void.

However, it is likely that that a provision which seeks to limit the company’s liability for delays caused by circumstances outside its control would be acceptable under the CRA.

The CMA Unfair Terms Guidance states that clauses excluding liability for delay are more likely to be regarded as fair and thus to be enforceable where:

  • They are restricted in scope to delays unavoidably caused by factors beyond the company’s control.
  • The company takes reasonable steps to prevent or minimise delay.
  • If there is a risk of substantial delay, the customer is given a penalty-free right to terminate.

Generally good communication with the customer throughout the removals process should minimise upset when the circumstances are clearly beyond the removals company’s control due to Covid-19.

 

If there is no force majeure clause will I be in breach of contract if I am no longer able to perform under it?

Again, this will depend on the terms of the particular contract. If the obligation to perform is absolute, then a failure to perform according to its terms can be a breach, even if the party is not morally to blame.

Fault is not a requirement for breach, unless the contract says it is. If the failure to perform is a breach, it will normally give the other party the right to claim damages, and possibly also the right to terminate.

In the absence of a force majeure clause, a party looking to defend themselves against a claim for breach of contract, may want to explore whether frustration is applicable to the particular contract.

 

The force majeure clause in my contract requires a certain amount of notice in order to rely on it – should I serve it on my counterparty “just in case”?

This depends what the effect of the notice is and the risk/benefit of giving that notice. Once you serve the notice you cannot un-serve it.

For example, if you serve notice on your supplier “just in case”, this might allow the supplier to end the contract because they found it unprofitable or for other reasons unconnected with the force majeure event.

It may then prove impossible to bring in an alternative supplier, due to the extent of the Covid-19 pandemic, and therefore great consideration must be given to consequences before invoking any force majeure clause.

 

In the absence of a force majeure clause, if the contract is frustrated, must the non-performing party pay damages?

If a party fails to perform their obligations under the party, but the impact of Covid-19 does not lead to frustration of the contract, the other party may entitled to claim damages for breach of contract.

If frustration is established, as discussed above, the Law Reform (Frustrated Contracts) Act 1943, allows recovery of monies paid under the contract before it was discharged, subject to an allowance, at the court’s discretion, for expenses incurred by the other party.

However, Section 2 of the 1943 Act excludes contracts for carriage of goods by sea, the sale of specific goods, insurance contracts, and certain charter parties, but regardless of whether the 1943 Act does apply, there may also be a common law action against the non-performing party for unjust enrichment if they are able to benefit from a contract when they haven’t performed their obligations.

 

Can we suspend performance of a contract, or agree with the other party to abandon the contract if Covid-19 make its too hard or expensive to perform?

In the absence of an express contractual term to suspend the performance of a contract, there is no general right to do so but the affected party could approach the other party to request a contract variation.

If this consent to suspend isn’t given and the contract isn’t frustrated, by stopping performance the affected party is in breach of the contract and this may trigger termination rights for the non-defaulting party and possible recovery of loss and damages.

Contracting parties can end a contract by agreeing to abandon it. However, this agreement will need to be well documented to ensure there has been offer and acceptance of this agreement.

If performance of a contract becomes more difficult or expensive the party who fails to perform is in breach and must pay damages.

Even if abandoning the contract is not yet a breach (because no obligations are currently due), it could repudiate the contract. The other party could then accept the repudiation, end the contract, and claim damages for all its loss caused by the termination.

 

Can the parties vary the contract or renegotiate its terms?

Yes. And this is often the best way to proceed, if possible.

If parties do agree to vary or renegotiate the terms of their contract, they should comply with any relevant requirements of the contract, such as recording any variation in writing, and carefully consider the long term impact of any proposed changes to deal with the immediate situation projects are currently facing. Accurate record keeping is essential.

The parties should consider whether changing one aspect of their arrangement has a knock-on effect on other provisions, such as:

  • Payment provisions.
  • Whether contractual insurance requirements require amendment and whether the parties have the relevant insurance cover to comply with those obligations.
  • Whether the changes they agree are in any way time limited, so that they apply only for a limited period.
  • Whether the changes need to be reflected elsewhere in the contract chain (either down, to subcontractors and suppliers or up, to funders and customers).

Please contact our corporate team at commercial@backhouses.co.uk for more information.

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