Entering into a new contract during the COVID-19 outbreak
- AuthorThomas Emmett
In the UK and around the world, governments have announced a variety of measures to support businesses whilst COVID-19 lockdown restrictions and social distancing measures remain in place.
Many businesses are facing commercial and practical challenges they could never have envisaged. Because of this, business owners should consider new commercial relationships carefully and not rush into signing new agreements without taking professional advice beforehand.
If you are currently considering a new commercial agreement and you have entered into contracts in the past, you will know that their terms are usually very important. However, in such uncertain times for businesses they are perhaps more important than ever. Whilst it remains the case that payment clauses, title clauses and termination clauses remain pivotal, there are other terms of commercial agreements that should be carefully considered and negotiated.
In the current crisis, this is a hot topic. Force majeure is an event which cannot be foreseen (e.g. a global pandemic). A force majeure clause typically allows a party who fails to perform, or delays in performing, its obligations under a contract, to avoid liability for such non-performance or delay if it was caused by a force majeure event. Force majeure provisions are common in commercial contracts, but the comprehensiveness of such clauses varies significantly.
For business customers, the aim should be to negotiate a narrow force majeure clause. This is so businesses supplying goods or services to the customer can less easily wriggle out of their contractual obligations.
In addition, business customers should be carefully considering what remedies a supplier of goods or services has if a force majeure event occurs. Suspension of supply may be preferred to a complete right to terminate a contract.
For business suppliers, the preference will be to negotiate a broader force majeure clause. For example, the list of events that trigger a force majeure clause should be much longer and include not only “epidemic” and “pandemic”, but also “virus outbreak” and “government action”. Force majeure provisions are typically strictly interpreted by judges, so a wide “catch all” clause would also be helpful.
Economic hardship clauses
Force majeure clauses can state that economic factors constitute a force majeure event. However, as an alternative, business suppliers may instead prefer to negotiate an “economic hardship” clause.
Such a clause deals with circumstances where a change in economic conditions does not prevent a party from fulfilling its contractual obligations but does make performance of the contract much less profitable or more costly. Economic hardship clauses may be more desirable because, as stated above, courts take a strict approach to interpretation of force majeure clauses.
I would recommend that before entering into any commercial contract during the current pandemic, that business owners ask themselves the following questions:
- When are the obligations stated in the contract required to be performed? How realistic is it that they can be performed due to COVID-19?
- Can the obligations be performed using contingency measures, such as working remotely?
- Has it been agreed how risk and liability should be allocated if performance of the contract is delayed or not performed at all?
- Is it possible for your business or the counterparty to the agreement to obtain insurance?
Whether you’re working from home, or not, if you have any queries relating to commercial agreements in light of the COVID-19 outbreak, please contact our expert business lawyers.
I’m working from home, but available to talk if you need me. If you have a question, I’d much rather you ask it and we spend some time having a free chat, than not.
There are enough things to worry about at the moment; don’t let that niggle be one of them – get in touch. I can be contacted on 01245 453847 or email@example.com.