Businesses Must Review Contract Terms in Light of Covid

With global supply chains hugely impacted by the outbreak of Covid-19 and the resulting pandemic lockdowns, Peter Kouwenberg, Associate Solicitor in the Corporate and Commercial department at Taylor Walton, explains the importance of drafting thorough force majeure (FM) clauses to defend against a breach of contract.

Since the pandemic, there has been a lot of confusion concerning where responsibility lay for delayed, missed and incomplete deliveries, which again illustrates the importance of contract clauses like force majeure.

These clauses, when drafted correctly, are designed to address issues arising from unexpected future events beyond the reasonable control of the contracted parties.

Naturally, these cases can take a long time to reach court, so we are yet to see any significant judgments in large FM claims arising from the pandemic. However, the Courts have already handed down judgments on injunctions related to FM clauses, stating that each should be considered on its own merits.

Therefore, businesses should take the time to ensure all FM clauses are carefully worded, so if they need to rely on them to defend a breach of contract, they can be confident that it will successfully do so in the current climate.

The importance of a good ‘force majeure’ clause

When including an FM clause, it should enable the business to invoke a rights of suspension and/or termination of its duties and obligations under the contract.

The inclusion of the words ‘epidemic’ and/or ‘pandemic’ in the clause may be sufficient to trigger FM. Where these terms have not been included, the emergency measures to address or contain any outbreak, like a travel ban or quarantine zones, may be sufficient to trigger FM.

If a business seeks to invoke an FM clause, it must show that any failure to perform its contractual obligations cannot be attributed to other factors, such as any additional cost of performance.

Any FM clause cannot be taken in isolation, but interact appropriately with the other terms of the contract, such as any obligation to mitigate loss, and the procedure to notify the other party.

Key actions for businesses in 2021

The first step is for every business to review existing standard terms and conditions of supply and/or purchase, carefully scrutinising all proposed new contract terms, especially to see if FM is expressly included within the contract.

Consider what is included as an FM event and what procedural steps are involved in relying upon FM, such as the obligations to notify the other party. You should also consider what effort to perform/minimise loss will be required on the part of your business or your supplier.

Finally, consider the overall impact on the contract as a consequence of FM being triggered, like termination rights. Then check your insurance position regarding a supplier invoking an FM clause or you having to, hoping to protect your business.

Remember, if a contract does not include an FM clause, it may in limited circumstances be possible to seek redress on the basis of frustration, but this is a complex legal matter with very strict requirements to be met.

In English law, the concept of frustration is that contract obligations may be discharged in their entirety if an event has occurred, without the fault of either party, that renders it physically or commercially impossible to fulfil the contract.

Such an event might also transform the obligation to perform, into a radically different obligation from that agreed when the contract was signed, again allowing the obligation in the original contract to be discharged. However, it’s worth remembering the threshold for showing a contract is frustrated, is generally extremely high.

Force majeure clause is not a magic bullet

From a business perspective, the main aim is to minimise potential loss in FM scenarios, so it is vital to give a prompt, contractually compliant notice to the other party if performance disruptions are to be expected, as this will allow them to make the necessary adjustments.

Instead of leaving the other party to solve the problem, it’s critical that your business explores alternative ways of performing contractual obligations, so that the long-term relationship is protected moving forward.

Ensure all written evidence is stored, as either party may wish to take matters further, in which case this evidence could prove valuable in proving your case.

Whilst we await the outcome of COVID-19 FM claims, there is plenty for businesses to consider, from checking contract clauses cover all possible eventualities to checking they have adequate insurance cover, but a review of standard contract terms and conditions is a crucial first step.

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