Corporate + Commercial FAQs
In light of these challenging times, businesses are looking for more guidance on what they can do to manage their contracts. Our Corporate + Commercial lawyers have answered some frequently asked questions below about commercial contracts, and will keep this page updated as and when anything changes.
What happens if a business cannot fulfil its contractual obligations to suppliers or customers?
Most businesses will have contracts in place which now cannot be fulfilled. Under business terms, if a business fails to fulfil a contract, it will be in breach of contract and potentially liable to the other party.
Each situation is different and particular facts and circumstances, along with the precise wording of the commercial contract, will always need to be considered carefully.
Can I rely on a ‘force majeure’ event?
In general terms, force majeure means the occurrence of an unforeseeable event which is outside the reasonable control of the parties, and prevents that party from fulfilling its obligations under the contract.
In English law, force majeure is not defined and the concept cannot be implied into a contract. In order to rely on it, there must be express terms in the contract dealing with it.
A typical force majeure clause may include the following information:
- defines what events constitute a force majeure event;
- outlines what happens when an event occurs;
- outlines the remedies available (e.g. this may be delayed performance of the contract for a certain time period); and
- details the steps which the party relying on the clause has to take. It’s really important that these steps and any time limits specified are followed correctly.
Typically, a party relying on such a clause will need to show that:
- a force majeure event has occurred which is beyond its control;
- it has prevented, hindered or delayed its performance of the contract; and
- it has taken all reasonable steps to avoid or mitigate the event or its consequences.
Whether or not a party can rely on a force majeure clause will very much depend on the specific words used in the contract, and you should always seek legal advice before exercising any rights under such a clause.
My contract doesn’t have a force majeure clause, is there anything else that might help me?
Depending on the nature of the business, there may be other relevant clauses in the terms and conditions which could assist in these unprecedented times. For example, in the events industry, there may be clauses which deal with the postponement, abandonment or cancellation of events. There may also be termination rights triggered by a change in law, that could apply as a result of any relevant Government response to the pandemic.
There is a doctrine called ‘frustration’, where parties are discharged from their contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different.
The courts have tended to deploy this doctrine in limited situations and will not find a contract is frustrated if it is simply harder or more expensive to perform. However, in current circumstances with governments across the globe imposing significant restrictions, it could apply. If a business feels they need to rely on frustration, they should seek legal advice on the possibility of it applying.
Should I speak to the contract counterparty and ask them for help?
You may wish to discuss this with your counterparty who could well be sympathetic given that the current crisis is impacting everyone one way or another. However, you should be careful so as not to prejudice your position in the event that the counterparty looks to pursue a claim against you in the future and seek legal advice at an early stage if you have concerns around this.
If you expect your business to be disrupted due to the pandemic, we recommend considering the following action points:
- Look at the clauses of contracts with the other parties to find out what situations it covers and if any time limits or notification requirements apply;
- Keep written records of communication between parties about the disruption;
- Check your insurance policy – does it cover loss suffered as a result of disruption due to Covid-19?
Our commercial contract lawyers have been supporting a wide range of businesses with their legal needs for years. Getting the right legal advice is essential for the smooth running of your business.