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COMMENTARY: The impact of coronavirus on commercial contracts

Introduction

The coronavirus pandemic has caused huge disruption to the worldwide economy. The pandemic has impacted businesses of all sizes and reached every sector. Last month many non-essential shops and businesses were forced to close at short notice following the introduction of emergency restrictions by the UK government. The scale of the closures is unprecedented and has had a ripple effect across the global economy. It has also affected the ability of businesses to enforce or comply with their contractual rights and obligations.

Businesses have been forced to close their doors and directors and contract managers have growing concerns about their ability to meet ongoing contractual and financial obligations during the lockdown period. They may also be worried about whether existing contracts may not be commercially viable when trading resumes. Businesses which are still trading may also be experiencing difficulties such as problems with performance of supply contracts or disruptions in the supply chain. They may also be finding that their ability to adapt and change their business model to meet evolving customer demand, including migrating traditional ‘offline’ business ‘online’, or comply with the UK government’s restrictions, is restricted by existing contracts.

Of course, with any contract, it is open to the parties to return to the negotiating table when problems arise to see if there is scope for a new deal. Most businesses have been affected by the coronavirus pandemic and many will be looking to mitigate risk at a time of great economic uncertainty; renegotiation may be a possibility.
Over the last few weeks Druces’ commercial lawyers and the Dispute Resolution Team have been dealing with enquiries from businesses who want to try to renegotiate or terminate their contracts as a result of the pandemic. Neither option is without risk and it is important that the terms of the contract (and the procedural requirements for any termination) are carefully considered.

This article looks at some of the ways a party may be able to terminate a commercial contract or bring it to an end on the grounds of coronavirus.

Methods of how a commercial contract may be terminated due to coronavirus

1. Force Majeure

It may be possible for a party to terminate a contract on the grounds of force majeure. This is not an automatic right in English law: this option will only be available if there is an express clause within the contract and the terminating party can demonstrate that the clause is triggered by a pandemic. The precise wording of the force majeure clause is of critical importance and must be carefully considered before the clause is invoked. Further information on force majeure clauses and when they can be used is available here.

2. Frustration

Another option is to consider whether the contract has been frustrated. The common law doctrine of frustration can terminate a contract automatically where an unforeseen interruption (beyond the parties’ control and not contemplated when the contract was made), renders the contract impossible to perform or changes the parties’ positions under the contract in such a way that their original intention can no longer be met. It is not easy to decide whether coronavirus constitutes a frustrating event which goes to the root of the contract; careful consideration of the facts of the case is required. The temporary nature of the pandemic may prevent some parties invoking frustration as a way to avoid a contractual liability. Further information on the doctrine of frustration is available here.

3. Terminate the contract under the express provisions

A party should also consider whether it has a right to terminate a contract under the express provisions. Most commercial contracts are in writing and include a specific termination clause which sets out how a party can terminate the contract, what notice is required, what grounds can be relied on and what the consequences will be. It may be safer to terminate the contract under the express contractual provisions, rather than seeking to rely on a force majeure clause or the doctrine of frustration. If the contract contains an express termination provision, it is important that the terminating party follows the correct procedure otherwise it risks a claim for damages for wrongful termination.

4. Termination at common law

A party should also consider its right to terminate the contract at common law. This option will be available where the written contract is silent on the question of termination, or no written agreement is in place at all. It is also worth considering as an alternative to any express termination provisions. Under common law a party has a right to terminate a contract on reasonable notice. What constitutes reasonable notice depends on the facts of the case and will require a careful consideration of the commercial relationship and intention of the parties.

5. Termination on the grounds of breach

If the coronavirus pandemic has impacted on the performance of the contract in some way, it may be possible to terminate for breach of a condition of the contract or other repudiatory breach, in other words, a breach so serious as to justify termination. The terminating party will need to be able to demonstrate that a condition, or key term, in the contract has been breached or that the other party has refused to perform. A careful review of the express contract will be required to identify which terms (if any) have been breached and whether any procedural steps are required before the party can terminate the contract on the grounds of breach. The party wishing to terminate should be careful not to affirm the contract inadvertently and lose the right to end it. 

6. Other express provisions within the contract

Where a contract is in writing, it is also worth considering whether there are any other express terms of the contract which could be relied upon to bring the contract to an end or to vary it. For example, many supply contracts contain price or minimum order adjustment clauses which allow the parties flexibility to adapt in certain circumstances. The contract may also contain a “material adverse change” clause which allows the contract to be terminated in certain circumstances.

How we can help

Has your business encountered any of the issues raised in this article? If you have any queries, please speak to your usual Druces contact or:

(Co-written by James Flanagan, Trainee Solicitor)

 

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