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No need to stick your head in the sand – how to deal with contract disputes arising from Covid-19

Written by Clive Rich on Monday, 04 May 2020. Posted in Commercial law, Legal

With many businesses facing so much uncertainty at the moment and as commercial relationships are tested, there is every likelihood that you will face some form of contract dispute as a consequence of the Coronavirus.

No need to stick your head in the sand – how to deal with contract disputes arising from Covid-19

With many businesses facing so much uncertainty at the moment and as commercial relationships are tested, there is every likelihood that you will face some form of contract dispute as a consequence of the Coronavirus. This may be as a result of a supplier or customer cancelling or proposing not to honour a contract with you, or as a result of you feeling that you can no longer proceed with a contract yourself.

Whether this will be in relation to your customers, suppliers or other third parties such as contractors, there will undoubtedly be hurdles and challenges for your business to overcome. 

1. assess your contracts

Assess your contracts carefully so you know exactly what the obligations are in relation to eg delivery, quantities, quality, service levels, price, payment terms, warranties, undertakings, and guarantees.

If you feel that something needs to change is there any right to vary the contract unilaterally or is that something that can only be agreed by both parties?

Is there wording allowing for suspension of the agreement or termination wording that could be applicable? For example, clauses that legitimately allow for termination on notice at will, or if one party is in breach, or one party is in financial difficulties or there has been a ‘material adverse change’ to one party’s circumstances?

Does your contract have a ‘Force Majeure’ clause allowing for delay by one party of its performance obligations and if so, what does it say? Force Majeure clauses are usually drafted to allow either party relief from the consequences of a failure to comply with an obligation, where that failure is due to the occurrence of an event outside of its reasonable control. The use of terminology in this clause will be highly relevant so you may need specific advice as to whether you can rely on this clause. For example, does the clause cover events like an epidemic? What must you do to invoke the clause (it is common for the clause to require the party seeking to rely on the clause to demonstrate that they have done everything they reasonably can to perform or mitigate the failure). It is also important to point out that this clause may detail a prescribed method for termination so you will need to comply with notice provisions set out elsewhere in the agreement. It may also be that this clause only provides temporary relief since it is common for the other party to be able to terminate the agreement if the failure to perform lasts longer than a certain period of time (say 90 days).

Even if the contract doesn’t contain a Force Majeure clause could the contract be deemed ‘frustrated’? Frustration is a doctrine the courts can apply to relieve parties of future performance of a contract, where there is a change in circumstances, after the contract was made, which is not the fault of either of the parties, which makes the contract either impossible to perform or negates its commercial purpose. Where a contract is frustrated, each party is discharged from future obligations under the contract and neither party may sue for breach. Its important to note that ‘frustration’ is narrowly construed. The courts won’t allow a contract to be deemed ‘frustrated’ just because one party finds the agreement more expensive to perform or get the full commercial benefit from the contract.

What are the consequences for failure to perform in the agreement? Eg is there an indemnity clause in favour of one party, or, conversely a limitation on either the type of liability or the amount for which one party can be liable to the other? 

2. talk to people

If you feel that the performance of contractual obligations may be affected, it’s really important to discuss this with your counterparties. Remember every business is going to be affected, so chances are your counterparty will have a good understanding and may be willing to compromise.

It may be that as a result of those discussions, you are able to renegotiate some key contractual terms such as payment structure, deliverables, etc.

Make sure you keep a detailed account of all discussions, emails and correspondence between you as this may be necessary in the future, even if you do reach some form of compromise.

3. check your insurance policies

Are you covered for business disruption, as you may be able to rely on this to cover any contractual issues and/or loss that may arise? If not are there other aspects of your existing insurance policies that could help you (eg legal expenses coverage)? Most insurers require a claim to be notified very quickly so if you think you may be covered its important to notify your insurer early.

4. consider ADR or formal mediation

When we come out the other side of the current disruption, the Courts will most likely have many months ahead of them trying to catch up. Therefore, resolving a dispute rather than litigating in the Courts, is going to be a much more attractive route, not least because it will be less expensive and will probably achieve a faster recourse.

Consider ADR (“Alternative Dispute Resolution”) such as a formal mediation to resolve this rather than looking to the Courts. Mediation has many significant advantages particularly in this present time. It is significantly cheaper and can also be done remotely with a skilled mediator using conferencing facilities. Often the outcomes of mediation can be more effective than a Court, because the mediator can help the parties to achieve more commercially based settlements, which a Court would not be able to do. Mediation is successful in resolving disputes 70% of the time and usually only takes one day as opposed to the months normally involved in formal court proceedings. Your contract may provide for mediation or, if not, the parties can agree on a mediator and a mediation process. The Mediation also has the benefit of being held in private and it is confidential, whereas court proceedings are normally a matter of public record.

There is no doubt that Covid-19 has impacted every UK business. We offer a free 15-minute consultation with one of our expert lawyers to assist SMEs needing advice at this time.

About the Author

Clive Rich

Clive Rich

Clive Rich is the CEO and Founder of LawBite, a virtual legal platform that helps SMEs get easier access to expert legal advice that is clearer and more affordable. Clive is a former barrister and expert negotiator.

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