Contracts and supply chain: What you need to know
In the face of COVID-19 businesses are facing huge amounts of disruption on all fronts. For many there will be question marks over their ability to fulfil their contractual obligations. This means it has never been more important to review the precise wording in your contracts.
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Dispute resolution contacts
Frequently Asked Questions:
- What’s happening with the courts?
- Can litigation be continued virtually?
- What about mediation and other forms of Alternative Dispute Resolution?
- What should I do if I am concerned that I or one of my suppliers might not be able to meet the terms of a contract due to COVID-19?
- If I do discuss matters with other parties in the contractual chain is there anything I need to be particularly careful of?
- I’ve heard the phrase ‘Force Majeure’. What is it and can it be used to cancel a contract?
- I’ve also heard that contracts can be ‘frustrated’. Is that the same as ‘force majeure’ and does it cancel the contract?
- Could I have the benefit of insurance that covers me for loss of profits / business?
The courts are continuing to function, although some buildings are not open to the public and some buildings are temporarily closed.
Judges are trying to accommodate hearings and trials where they can using audio and video technology. Crucially, this means that matters can still be pursued through the courts and urgent relief such as injunctions can still be procured where necessary.
Judges are trying to accommodate hearings and trials where they can using audio and video technology such as telephone hearings and hearings via Skype and BT Meet Me. However, be prepared for delays and if a matter is not urgent hearings may be adjourned to accommodate the circumstances. Lawyers for the parties will be expected to adopt a constructive and co-operative approach with each other to listing hearings and other practical arrangements.
Mediation can be done remotely, although it is less common.
Depending on the nature of your case you might prefer to wait a little while to see how long social distancing is likely to remain in place before deciding whether or not to engage in a virtual mediation. However, if you cannot wait or if social distancing is going to go on for some months it should not prevent the parties engaging in ADR if they want to.
What should I do if I I am concerned that I or one of my suppliers might not be able to meet the terms of a contract due to COVID-19?
Speak to the parties that you contract with.
They may have similar difficulties and want to discuss practical commerical solutions. If you can try and work with them and any other parties in the contractual supply chain to agree a sensible solution that works for all, this is preferable to fallling out and litigating through the courts.
If I do discuss matters with other parties in the contractual chain is there anything I need to be particularly careful of?
First of all, check the particular terms of your contact with the party that you are doing business with.
Often contracts enable the parties to agree to vary their terms, although the contact might stipulate that this has to be done in writing or provide some other mechanism to achieve this, such as the giving of a particular number of days notice.
You will need to consider whether any such variation will be temporary and, if so, do you intend that the arrangement will revert back to its orignal terms or will it be permanent? Will any changes have an impact on other provisions of the arrangement such as security documents, parent guarantees or payment mechanisms and in particular other contracts that are perhaps related to a particular project?
You will need to check whether any changes impact on any insurance that you might have. Keep accurate records of any discussions and decisions as they may be helpful evidence should a dispute ensue.
Similarly, whilst the contract might not provide that it is necessary to record any changes or variation to the contract in writing, you should always do so to ensure that each party has a clear and accuate record should a dispute arise in the future over what was and was not agreed.
A force majeure clause is a contractual term that regulates the consequences of subsequent events beyond the parties control on the obligations of one or other of the parties (i.e. earthquakes, acts of God, etc).
A lot of contracts between parties do contain a ‘force majeure’ clause, often buried away towards the end of the contract, particuarly in any standard terms and conditions. The precise operation and consequences of a force majeure clause will depend on how it is drafted and so it is vital to look at the wording used in the contract.
Typically such clauses operate to allow one or both of the parties to be ‘excused’ from performance or allow a party to ‘suspend’ performance or some or all of its oligations if the event occurs.
If you are considering trying to invoke a force majeure clause or a contracting party is proposing to rely on such a provision then you ought to seek legal advice as soon as possible. Often, despite what may seem clear wording, there are legal arguments to be had around whether the event has actually prevented or hindered performance and whether a party has taken reasonable steps to try and avoid or mitgate the event or its consequences. You should also check any policies of insurance that might be affected.
I’ve also heard that contracts can be ‘frustrated’. Is that the same as ‘force majeure’ and does it cancel the contract?
A legal principle known as ‘frustration’ may apply if, as a result of the coronavirus performance of the contract has become legally or physically impossible to perform, without blame or fault on the party seeking to rely on it..
Whether a contract is frustrated depends upon a consideration of the nature of the bargain reached between the parties when considered in the light of the supervening event said to frustrate that bargain. If a contract is frustrated it will end immediately. The principle of frustration is not lightly invoked by the courts and legal advice ought to be sought.
Business Interruption (BI) insurance typically covers revenue losses flowing from physical damage to property and so is more often then not unlikely to provide cover.
However, sometimes businesses procure extensions to their insurance cover, including extensions for notifiable diseases. COVID-19 was declared a notifiable disease on 5 March 2020, although that does not mean it is automatically included in any insurance cover; sometimes insurance policies name the particular types of notifiable diseases that are covered.
The first step for any business should be to speak to your insurance broker.