The Coronavirus pandemic is affecting commerce in every sector and jurisdiction. Businesses are trying to work out what they can do to lessen the consequences of COVID-19. It is a trade-off between the risks that a business can swallow and the urge to be flexible to counter the potential fall-out. Disruptions are inevitable as companies consider how they can fulfil their obligations and therefore contractual relationships, and the contracts underpinning those relationships will be under intense scrutiny as businesses try to minimise the impact of the virus. We consider this position from the stand point of English contract law.
Much of the recent commentary has focused on whether COVID-19 is a force majeure event, which would entitle one party to suspend performance or cancel an existing contract, but in this briefing we take a holistic approach to contracts as a whole and consider what other clauses may be utilised to help businesses during these uncertain times. These clauses are important to consider as they can give a business significant protection, provide remedies to non-performance, or set out the practical requirements to follow to ensure that any changes to the terms of the commercial relationship are valid. The aim, as far as possible, is to avoid disputes further down the line.
Practical Steps to take now
- Start a dialogue with your counter-party about the current and potential impact on your relationship.
- Keep records of all discussions and decision-making so that later on you have the evidence to justify your actions should you need proof.
- Take a holistic view of your contract analysis – see what clauses in the contract may be of help and don't forget to consider your boilerplate clauses.
- Any changes to the terms must be done in accordance with the notification provisions in the contract for the course of action to be valid.
- If you cannot fulfil your obligations and negotiations are not getting you anywhere, seek legal advice to ensure you do not compromise your own position.
We look at each of these steps in more detail below.
Take a 'holistic' view of the contract analysis (including in your software-enabled contract audit tools etc.)
In addition to force majeure clauses, there are a number of other clauses which might provide a business with significant protection/remedies. Often these will be particular to the type of contract in place between the parties or to specific industries or sectors, but may include:
- Material Adverse Change clauses in loan agreements, other finance documents, and in business sale transactions;
- express compliance obligations with health and safety and other applicable regulations;
- express hardship clauses entitling suspension of performance, or variation of terms, in view of economic change;
- risk allocation clauses in relation to changes in law or regulation;
- dual-sourcing or multi-sourcing clauses entitling a customer to appoint other suppliers if an existing exclusive supplier cannot sustain performance;
- key personnel clauses earmarking named people for particular commitments.
It is worth reviewing your relevant contracts to identify any clauses of the type listed above to see what options and remedies they may offer you.
In circumstances where businesses use software tools to interrogate large volumes of contract documentation to support their contract review, exercising a holistic approach is particularly important. If the software is programmed to search for Force Majeure, or words like 'disease', 'governmental order' etc., but is not directed in accordance with a wider, holistic perspective, available legal remedies and protections could quite easily be overlooked.
Don't forget the boilerplate clauses
These clauses, frequently drafted at the last minute and residing at the back of the contract, are often overlooked but they can contain important provisions which are very relevant to businesses seeking to protect or alter a commercial relationship in light of the effects, or the potential effects, of COVID-19.
The governing law clause should be given particular attention as it determines how the other clauses in the contract are interpreted. For example, the validity of a force majeure clause will be considered differently depending on whether the governing law of the contract is English law, French law or Chinese law. Many civil law jurisdictions such as France and China have statutory force majeure rights and contractual parties can benefit from those rights irrespective of what their agreement says. English law, on the other hand, has no such statutory rights; force majeure is not implied into contracts under English law but is contractually agreed to, and force majeure will only be applicable if the contract contains a force majeure clause. France and China have already declared that COVID-19 is a force majeure event under their own laws, with China issuing governmental force majeure certificates. There is some concern about whether these certificates provide decisive evidence of force majeure for purposes of English law contracts and therefore companies may not be protected from liability even though a certificate has been issued. The English courts interpret the doctrine strictly, and so it is worth looking carefully at the wording of the particular clause agreed by the parties to see how it is constructed and the events mentioned within it. Under English law, validity can depend on not just the declaration of a force majeure event, but also the way the counter-party responds to it and the certificates do not address this.
Consider what the contract says about variations and amendments. Can the parties agree to vary the terms of a contract by mutual agreement and what are the formalities that need to be complied with? Sometimes the contract will include an express term requiring any variation of its terms to be in writing to prevent amendment by other means (e.g. oral). This is known as a No Oral Modification clause (NOM). NOM clauses are common in agreements because they prevent variation to the written agreement by informal means and they help to avoid disputes about whether a variation is intended and what the terms of the variation are. If you do agree to vary your agreement due to COVID-19 challenges, ensure that the changes are properly documented in accordance with any NOM clause.
The contract may contain a waiver clause. A waiver (also known as a "no waiver") clause, seeks to ensure that a party's failure to enforce its contractual rights (whether deliberately or by oversight) in respect of the other party's breach of contract does not result in their losing those rights or remedies. However, the effectiveness of the clause will depend on its drafting, and a no waiver clause will not necessarily protect a party from post-breach inaction. Sitting on a breach is likely to amount to affirmation of the contract. In order to try and avoid this, and to rely on the clause, the non-breaching party should still reserve its rights and remedies and notify the party in breach by way of a formal contractual notice (see further below).
The dispute resolution clause will set out how any disputes between the parties will be determined. Businesses should do what they can to protect their commercial relationships. COVID-19 is an occurrence that will affect everyone in the supply chain, so working together to resolve issues seems the best way forward. Discussing concerns with your counter-party should be the first step, and only then if parties are unable to agree should more formal steps be taken to resolve matters. The contract may already have an escalation clause built into it which records the parties' agreement to resolve any dispute between them on a staged basis. Each step is designed to handle the dispute if it has not been resolved by the previous step and escalates the dispute management to a higher level. Typically such a clause starts with structured negotiations, followed by an alternative dispute resolution mechanism such as mediation before a binding mechanism (litigation or arbitration).
If the jurisdiction clause stipulates that any disputes will be heard in the courts of England & Wales, and your counter-party is based outside the UK, it may be prudent to ask them to nominate an English law firm to accept service of any future proceedings if the contract does not contain a process agent clause. It is likely that any future court proceedings in relation to COVID-19 could be many months, or even years, away as the ramifications of the disruptions will take time to filter through, and from 1 January 2020, as a result of Brexit, the UK will be outside the EU civil disputes cross-border framework. A process agent clause will help to make service of court proceedings easier especially if your counterparty is located within the EU.
Notify, notify, notify….. and in a meticulous way
Notification provisions under contracts should not be ignored and they can be extremely important. If a 'force majeure' or similar clause requires notification of the counterparty in order to be relied upon – and many do – the business must follow that requirement meticulously. English law places huge importance on this. It is equally vital to follow all related practical requirements such as who the notice should be addressed to, how it should be sent (and email is often not an acceptable method of notice) and the information which it needs to contain. No business wishes to be in a situation where it has robust contractual rights, but cannot rely on them in a timely way because it failed to notify at all, or its notice diverged from the requirements of the contract and is found to be invalid.
Record-keep on the factual circumstances and on decision-making
Finally, it is vital to emphasise the importance of good record-keeping. Under English law, if a party relies on a contract clause to suspend or vary performance, it must prove the facts justifying that action. In the context of COVID-19, it is therefore vital to retain credible records – including trustworthy public domain information where available - which set out the factual context for the decision in question.
This is important because the crisis is evolving by the day. Disputes about contract rights and remedies might play out months or years into the future, at which point it might be difficult to reconstruct the thinking of the business at the time of the decision. It's also important to document the steps the business takes to mitigate the impact of COVID-19, the alternative options which are available to the business at the time to perform the contract (or the lack of them!), and the basis for its final decisions. With events moving so fast, it is vital to create these evidential snapshots.
Conclusions: aligning to business strategy
COVID-19 is presenting daunting challenges, on both the business and human level. When carrying out contract reviews, always align with your wider business strategy. The age-old maxim - 'just because you have a right doesn't mean you have to use it….' – has perhaps never been more relevant. And in many situations, early engagement with contract counterparties and a collaborative resolution of issues will obviously be far preferable to an adversarial approach.
Therefore, there is no 'right answer' on how to manage the contractual challenge of COVID-19. However, if events externally are unpredictable and even chaotic at times (as well as being tragic on the most basic human level), at least businesses themselves are in a position to drive forward coherent, consistent strategies. Ensuring that contract reviews highlight the under-emphasised issues as well as the headline ones can hopefully help businesses everywhere to manage risk in these anxious and unusual times.
For more information, please contact the authors or your regular Bird & Bird contact.
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Last reviewed 19 March 2020