Our clients have been contacting our Commercial Dispute Resolution team for advice in relation to a broad range of enquiries. Here's our guide to the contractual challenges arising.
Our business has a contractual obligation to provide goods or services that it cannot provide due to Covid-19 or the current government restrictions, what should we do?
The starting point is to look at the wording of the contract. Check for provisions that allow you to delay performance or to terminate the contract. You may still have time to provide the required notice. However, you should also check whether the contract provides for specific consequences. For example you may need to return payments already made by the other party.
Some contracts will have what is known as a "force majeure" clause. These allow for particular events that are unavoidable, not the result of either party's actions, and that make it impossible for at least one party to perform the contract.
Existing contracts won't specifically refer to coronavirus, but they may refer to an epidemic, pandemic, or contagious disease. They may also refer to actions by government agencies or work stoppages, all of which may be relevant.
A force majeure clause may also set out (1) the consequences of a force majeure event occurring (i.e. the right to suspend performance or terminate the contract), and (2) what happens to any payments made and services/goods delivered prior to the force majeure event.
For information specific to supply chain difficulties, read more here.
What if the terms of the contract don't help?
Where there is no force majeure clause in the contract, the legal doctrine of frustration may well apply.
A contract can be discharged on the grounds of frustration when something occurs, after the formation of the contract and without default by either party, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.
Where a frustrating event has occurred in most circumstances the Law Reform (Frustrated Contracts) Act 1943 ("LRA") will apply. There are some specific contracts to which the LRA does not apply (such as certain shipping contracts, insurance contracts and contracts for specific goods which have perished). In those cases, or if your contract excludes the effect of the LRA there are common law rules which will apply.
Do we need to return monies already paid under the contract?
This depends whether the LRA or common law applies. In most cases the LRA will apply and it provides that:
- Money paid before the frustrating event can be recovered by the paying party;
- Money due before the frustrating event, but which has not been paid, ceases to be payable;
- You may retain an amount up to the value of expenses incurred out of money you have already been paid by the other party or, where money was due and payable at the time of frustration, you may recover a sum (not exceeding that amount) for expenses;
- Where a party has gained a valuable benefit under the contract before the frustrating event occurred, the Court may order them to pay a "just" sum for it.
Can't we just ask to postpone performance of the contract?
As advised above, you should first check what you are entitled to do under the terms of the contract.
If there is no provision allowing you to give notice to delay performance, and no force majeure provision of assistance, you should consider approaching the other party directly with a proposal. You may be able to reach an agreement that works for you both and takes the pressure off.
Read our guidance on renegotiating and varying contractual terms here.
We have customers that want to cancel and postpone orders or bookings, what can we do?
Again, you should start by looking at the terms of the contract between the parties. Check what the contract says you and the other party are entitled to do in these circumstances. There may be specific notice provisions that they need to comply with so make sure you check whether this has been done.
If a customer approaches you directly to negotiate an alternative arrangement consider whether it might be better to reach an agreement in order to maintain the relationship and avoid a dispute.
Our customer says that a force majeure clause or frustration will apply, are they right?
Force majeure can only apply where your contract contains a force majeure clause. Not all contracts have these.
Where a customer seeks to rely on a force majeure clause, you will need to check the wording of the clause as these vary. The nature and consequences of these types of clauses are explained at above.
Customers may assert that the contract has been frustrated. This will depend whether Covid-19, or consequential events, have made it physically or commercially impossible for a party to fulfil the contract, or has transformed an obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. This is fact specific and depends upon the nature of the contract and the particular obligations contained within it. See guidance on force majeure and frustration above.
Do we need to return payments that have already been made by customers?
See "Do we need to return monies already paid under the contract?" above.
If you require further assistance with these or any other Covid-19 related issues affecting your business, please contact us.