Finding yourself unable to perform a commercial contract due to circumstances out of your control is relatively unusual, but the scale on which this is now happening is unprecedented. Working through this difficulty now will be key to keeping your business running through the immediate crisis and shockwaves that follow.
Businesses often have a shared interest in finding a compromise, agreeing more time to perform obligations or a change to agreed terms. If you can secure some flexibility from your customers or suppliers, make sure your contract is varied. Often, any change must be agreed in writing (certainly this is good practice) as it is not enough to rely on good faith which can quickly disappear if one party suddenly finds themselves under pressure.
You may want any variation to be temporary. If so how and when do the parties agree when to go back to Plan A?
Some practical thinking around this will be needed.
The bigger problem arises when flexibility and goodwill are in short supply, and your counterpart wants to find a way out of the contract. What then?
Again it’s back to the contract (assuming there is one). If there is a Force Majeure (“FM”) clause, this may now come into play. Covid-19 is likely to be a “catastrophic event” with the potential to trigger the FM clause but that doesn’t mean the clause will automatically apply. Consider:
- Is the disruption to the contract directly caused by the Covid-19 outbreak?
- Are the breached obligations within the scope of the FM clause?
If the FM clause looks set to ‘bite’ consider:
- Is there a delay before the contract can be terminated?
- Must the parties try and resolve the issues before terminating?
- How must the contract be terminated and must notice be given?
If neither a written contract nor a contract with an FM clause exist, the legal doctrine of “frustration” may apply if it is physically or legally impossible to perform the contract or if the purpose of the contract is completely changed. A delay or inconvenience is not enough. Frustration will end the contract immediately.