COVID-19 | Avoiding claims for breach of contract
COVID-19 | Avoiding claims for breach of contract
During these strange and difficult times, many affected businesses will be concerned about whether or not they can continue to comply with contracts they have signed up to.
If a business cannot comply with its contractual obligations, or expects that it will not be able to in the near future, it should consider the contract to see whether or not this may provide relief (through termination or force majeure clauses) and if not, consider whether the law of frustration may come to its aid.
This webinar will give an insight into how businesses can treat contracts when they are unable to comply with them and what the consequences may be.
Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us.
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Hi, I'm Alex Ryan an Associate in the dispute resolution team here at Shakespeare Martin a welcome to today's webinar on coronavirus and contract termination force majeure and frustration. You will see on your screen that you're able to ask questions. So, please do so along the way and I'll answer as many as I can in the end. I will also share some of your questions with everyone after the webinar.
This webinar is going to look at the impact that coronavirus may have on businesses and And that contracts what the position is if they're struggling to comply with their contractual obligations and what actions they can take.
Coronavirus and its potential impact on contracts. So the first thing to do is to look at the contracts in place and see what they say. I'll be focusing in this webinar on inter business contracts. Now the starting position for contracts is that it's assumed they are freely entered into by both sides with equal bargaining power the position in law. Is that both sides know what they're signing up for For Better or For Worse as such if a party fails to perform its obligations, it's would be liable to the other.
For damages now in some cases contracts will have been drafted in a way that for see circumstances where if one of the parties has a problem performing their obligations, they may suspend performance of some or all of their obligations or terminate a contract or together, but the contract needs to expressly deal with this and I'll speak about this a bit later on during this webinar.
If the contract doesn't include those Clauses there are situations where the law will akin to give the party a power to terminate the contract and then the current climate is likely that many businesses will be struggling or will struggle at some point in the near future so comply with contracts.
So they may be concerned about complying with their contractual obligations because of coronavirus if parties can't comply with their contractual obligations, then they will be in breach of those contracts that may lead to a claim being brought against them for damages, which could be Can particularly where fixed time long-term contracts are concerned. And so this webinar looks into what the legal remedies are to help those businesses and provide relief for any breaches. What businesses need to know about their contracts. If businesses are struggling to meet their contractual obligations due to the impact of coronavirus and maybe Clauses in the contract that can help and allow those businesses.
To either suspend performance of their obligations or terminate the contract all together to save them from being on the receiving end of a clue. That is if that is a step that the business wants to take given that this might result in termination of the contract and businesses should think carefully about doing that because it is such a final step so generally contracts will allow parties to terminate the contract in certain circumstances.
It's important however to Not all breaches entitle a party to terminate a contract. So it's vital to look carefully at the wording of each and every contract and to take advice if in any doubt as to what they mean, you may see wording in contract such as material boot, which may not be defined in the contract. But which has been the basis of a number of Court claims over the years and so caution is advised certain Clauses may be defined as conditions or warranties both of which have different meanings. There may be a general no fault.
Termination clause which enables one or more of the parties to terminate the contract where there's not been a bridge but it's important to follow the procedure set out in the contract in these circumstances to make sure termination is effective and that you don't end up wrongfully terminating the contract and facing the claim yourself. Ultimately you need to check each contract carefully to see what it says. If a party's ability to comply with the contract is affected due to Coronavirus.
And general termination Clauses don't Supply then there's may be covered in the contract by force majeure Clause not all contracts have force majeure Clauses as it has to have been specifically agreed and the wording will vary between Clauses and contracts and so each case needs to be considered separately. Now the effective force majeure Clause maybe then certain circumstances where there's been an extraordinary event outside with parties control.
Then either prevents hinders or delays it from being able to comply with some or all of its obligations under the contract. It's permitted to suspend some or all of its obligations or to terminate the contract typical examples include things like acts of God including floods droughts earthquakes. Terrorism Wars plagues Etc. Now if a contract contains the force majeure Clause, this will need to be considered.
See whether or not it's expressly covers coronavirus as an event, which may be covered by commonly included events such as epidemics or pandemics or it might be covered under more general terms again. It all depends on the wording of the contract that we're looking at. If a contract does contain such a clause and it's likely to cover coronavirus that doesn't mean that it automatically applies and allows a party to suspend performance of its obligations.
For example until the lockdown has subsided or to terminate the contract clause may also refer to an active government as a force majeure. And so even if the word pandemic or epidemic is not used it may be that a party can rely on the recent decision of the government to close down non-vital business premises or for people to stay at home ultimately much will depend on the circumstances of the parties and the wording of the Clause, but often these Clauses only apply where a party is prevented significantly.
If not totally from performing its obligations under the Tracked due solely to that event and then its obligations have not just become slightly more difficult or impossible.
Parties are also often required to take all these and more steps to mitigate their losses. So for example taking steps to find an alternative supplier or hiring temporary or Locum staff if they don't take those steps and they're unlikely to be able to rely on a force majeure Clause the contract may also contain obligations regarding force majeure such as giving notice to the other side of the force Majora's of events effect on its ability to perform any of its obligations under the contract.
Which is why it's important to consider the contract from an early stage.
Now if contracts don't contain force majeure Clauses the law office tration May assist but needs to be pointed out that it's much much harder to rely on than force majeure.
The law office trajan comes into play when unforeseeable event makes compliance with the contract impossible or transforms the obligation to perform into a totally different obligation from that which the party originally signed up to do if applies it allows the contract to be Automatically terminated so that the parties aren't required to perform the obligations under the contract unlike force me draw. It does not allow for suspension. And so it's very much a final measure and a final step as to whether or not the law frustration applies to coronavirus.
It would totally depend on the facts of each case and the nature of each business and contract frustration is notoriously difficult to show is a party seeking to rely on it has to show that it would be in possible not just very difficult either physically or commercially for them to perform an obligation. That's absolutely cool to the contract as such making one or more non-essential obligations more difficult isn't enough normal delays or extra expense.
For example, it's not easy to apply for an event company that can no longer host an event because the venue has been closed the station is very unlikely to apply where for example the parties have To provision for such an event already such as the force majeure clause which mentions a pandemic or where the event could have been foreseen. For example, if a contract was entered into recently it may be arguable that an event such as coronavirus was foreseeable given recent predictions by the scientific community.
An equally it wounds apply where an alternative method of performance as possible. So for example, finding another supplier for stock if it applies when the contract is terminated from the time of the event the effect of this is that any existing obligations up to that point continue to be in play. The contract is not wiped out as though it never existed.
What is this is can do we're growing advisors impact in their contracts businesses should have their fingers on the pulse and recognize if they are currently or likely to struggle to comply with any of their contractual obligations due to coronavirus businesses should check their contracts at the earliest opportunity to see what they say. And if they contain any Clauses that may allow them to suspend performance of any or all obligations under a contract or two.
Terminate the contract to save it being in breach of contract. I'm depending on the existence of the wording of those Clauses in this is Gigi because it's going to change from case to case the parties will be expected to have taken all reasonable steps to comply with their obligations.
So for example to of salt up Financial packages to have employed agents to a found alternative suppliers Etc if those steps have been taken and they don't work and there are clauses in the contract that may assist then businesses can Look into exercising their rights under those Clauses to either suspend performance or tablet contracts all together. If there aren't any Clauses parties might be able to argue that the contract is frustrated. But as I've said this isn't straightforward and the party claiming. It must be in a position where coronavirus has made it impossible for them to comply with the contract. Also, it should be a last resort particularly where one is dealing with a long-term contract, which the company May.
Ultimately want to come back to after coronavirus has hopefully passed also remember the other Contracting party or parties may also be struggling and they might actually welcomed a suspension of the contract or way out of the contract. And so it may be appropriate to discuss the situation with them before taking any drastic action.
And importantly you should take legal advice.
If you're in any doubt, if businesses don't do the above, they could find themselves in breach of contract and facing games equally they have to balance that against the need to have contracts in play for when coronavirus passes conclusion as I've said above businesses need to keep their finger on the port. They need to check their contracts to see if they might help in the event a business can't comply with the contract anymore because of coronavirus.
They should also be taken all reasonable steps to comply and to think of ways that they can comply with their contract when exercising is termination clause Force majeure clause or arguing frustration.
It is a serious move and should not be taken lightly particularly as at the wrongful exercise of this and the Downing of tools may result in a breach of contract which can ultimately result in the other party terminate the contracts and claiming damages against you Exercise caution and if in any doubt take advice, hopefully the circumstances in which we find ourselves will change for the better sooner rather than later and if they do it's important not to tear up contracts in haste, but these are unprecedented times. So it's important that businesses are aware of their position and what options they have moving forward to safeguard themselves. I think this is likely to be an area subject to much Court action over the coming months.
Thanks for listening to this webinar, which I hope you found useful and relevant in the circumstances. I'll answer a couple questions now and we'll also send a note of all the questions and answers I've had along with the recording of the webinar. So the first question I've got here is can the parties agree to terminate a contract if they're both in difficulty as I searched on?
Yes, they can the parties can mutually agree to either suspend or terminate the This is why it's worth having open dialogue in some circumstances with other parties to the contract to see if such an agreement can be reached and if an agreement is reached in principle, the parties will need to check the terms of the particular contract to see what this says about how we amendment should be carried out to make sure that they're effective moving forward.
I've got another question here, which is what if I entered into a contract around the time that coronavirus started being reported. Can I rely on force majeure frustration? So split answer really for force majeure. The answer is most likely yes as there's not a strict requirement that the extraordinary event must have been unforeseeable. Hence, why force majeure events are specified in the contract.
There are events that the parties anticipated might have The answer for frustration is no you would not be able to show frustration of a contract if coronavirus was reported at the time.
The contract was entered into this is because frustration only applies where the event was unforeseeable and if it was reporting at the time it was clearly for Seattle what arguably say and I think one more question, which is I have a conditional contract which does not come into Force until the conditions precedent to have been met kind of rely on force majeure in the main body of the contract. So I think the answer to this is it's going to depend on the wording of the contract and each contract will be different but it seems unlikely from what's being said there is as the contracts including the force majeure Clause is not yet informed.
Until such time as the conditions presidents have been met and so the force majeure clause in the main body couldn't be triggered. So thanks so much for all of the great questions our follow up on these after the session and share these with you the further advice and guidance on coronavirus.
Please contact our dedicated resource Hub at shma.co.uk-- if you would like further information or like to discuss a specific query, Is it more detail then? Please do get in touch? Thank you very much.
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