HCR Law Events

Commercial Contracts

From force majeure to frustration and supply chain interruption, we answer your questions about commercial contracts. Call our free helpline on 08000 862 819 if you need advice.

Back to our Covid-19 Hub.

What is force majeure?

Can I rely on a force majeure clause?

How do I use force majeure to cancel contracts?

What action do I need to take now to cancel or postpone my commercial contracts with clients?

The Covid-19 outbreak means I can’t perform my contract. What should I do?

How will the Covid-19 pandemic affect my commercial contracts?

Are there any other options if I can’t rely on the force majeure clause?

Am I at risk of breach of contract?

What practical steps can I take right now on my commercial contracts?

What key terms do I need to look out for in SaaS agreements?

Can the build team charge for the extra costs if we continue building with social distancing measures in place?

What is force majeure?

Last updated 26 March 2020

Some legal systems have specific legal definitions of force majeure, which apply whether or not the contract contains a force majeure clause. However, that is not the case in England and Wales. Under English law, force majeure is not defined, either in statute or under case law. This means the concept of force majeure will not be implied in a contract. In other words, you can only rely on it if it is expressly covered in the contract. Most English law contracts define a force majeure event by as events “beyond a party’s reasonable control”. This is usually by way of a non-exhaustive list of the type of events covered. If there is no express reference to “outbreaks of disease” or “epidemics” in the list of force majeure events, the coronavirus may still be regarded as a force majeure event.

Force majeure provisions differ from contract to contract (if they contain them at all). As a general rule, if a contract does contain a force majeure clause, it is important to consider:

    • whether the definition of force majeure event covers ‘epidemic’, ‘disease’ or similar (if not, the clause is unlikely to bite, unless there is some form of ‘catch-all’ wording);
    • what obligations are placed on you and the contracting parties if a force majeure event occurs (e.g. regarding notification, taking steps to mitigate, etc.); and
    • what the implications of a force majeure event actually are, in particular with regards to termination of the contract.

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Can I rely on a force majeure clause?

Last updated 26 March 2020

It is also important to consider when any force majeure clause can be relied upon. Some clauses are widely drafted, in that they refer to failure to or delay in performing the contracts that arises from or is due to a force majeure event.

In our view, under those contracts, it might be possible to rely on the force majeure clauses where it has become very difficult (but not impossible) to perform the contract.

Other force majeure clauses might be stricter, in that they use a phrases such as ‘unable to’ or ‘impossible to’ perform the contract. In those circumstances, the force majeure clause may only be available if complete lockdown is ordered by the government.

Either way, it will be important to be able to demonstrate that it is the Covid-19 outbreak itself which has caused the non-performance / imperfect performance of the contract.

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How do I use force majeure to cancel contracts?

Answered 20 March 2020

  1. Cancelling a contract – First, check if your contracts contain a force majeure clause. If they don’t, they may include other terms which give you a general right to cancel the supply of goods, cancel services or cancel or reschedule an event. Many force majeure clauses merely provide for obligations to be suspended for the duration of the force majeure event. They rarely give rise to an immediate right to terminate, so make sure you check the detail of the clause before you act.
  2. Claiming damages – If your supplier fails to deliver goods or deliver on services because of disruption caused by the coronavirus, a claim may not be as straightforward as first imagined. Some suppliers may be protected by the wording of a force majeure clause, which would relieve them from liability where the delay or failure to perform is “beyond their reasonable control”.

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What action do I need to take now to cancel or postpone my commercial contracts with clients?

Last updated on 20 March 2020

  • Review all customer contracts in which force majeure may be a factor – whether used by or against you
  • If you are able to invoke a force majeure clause, consider the time limits and notice for doing so
  • Consider if there are any alternative ways of performing contractual obligations to your customers and take appropriate mitigation steps
  • Retain all evidence of disruption, including documents proving delay or cancellation
  • If entering into new contracts, draft clauses sufficiently clearly to cover eventualities such as the coronavirus outbreak
  • Consider whether you are covered by insurance – find out if you need to notify your insurers and if business interruption insurance applies.

https://www.hcrlaw.com/blog/i-want-to-cancel-my-contract-with-my-supplier-or-customer-what-do-i-do/

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The Covid-19 outbreak means I can’t perform my contract. What should I do?

Last updated on 20 March 2020

Start with compromise in mind

  1. Start by exploring whether the other party is willing to be flexible as compromise is generally better for bother parties.
  2. Agree any change 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.
  3. Consider any variation being temporary and agree when to parties go back to Plan A

What can I do if the other party will not compromise?

Review your contract (assuming there is one), looking for a Force Majeure (“FM”).  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?

What can I do if I don’t have a contract, or my contract does not have a force majeure clause?

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.

https://www.hcrlaw.com/blog/the-covid-19-outbreak-means-i-cant-perform-my-contract-what-should-i-do/

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How will the Covid-19 pandemic affect my commercial contracts?

Last updated 26 March 2020

As a business owner, you’re already taking steps to respond to the Covid-19 pandemic, prepare for it to get worse and protect your business, staff and customers as far as you can. If you are likely to have difficulties in meeting your contractual obligations or a contracting party has given an indication that it will fail to adhere to the contractual terms due to Covid-19, it’s time to carefully review your contract to determine your options.

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Are there any other options if I can’t rely on the force majeure clause?

Answered 26 March 2020

If you can’t rely on a force majeure clause, it might be possible to apply ‘frustration’. The Law Reform (Frustrated Contracts) Act 1943 applies where:

  • contract is governed by English law;
  • the contract becomes impossible for the affected party to perform or is otherwise “frustrated”; and
  • due to this frustrating event, the parties are discharged from their duties under the contract and the contract is “frustrated”.

The test under the Act is very high, as performance must either be impossible, or the frustrating event has made the performance of the contract result in something that is so radically different from what was originally envisaged that the original obligations are, in effect, incapable of being performed.

In practice, it is not easy to succeed with a frustration argument but it is worth considering given the serious impact Covid-19 is having on businesses and the supply chains.

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Am I at risk of breach of contract?

Answered 26 March 2020

Where neither force majeure nor frustration can be relied on, many businesses are likely to find themselves in breach of contract. In those circumstances, you should consider:

    • the consequences of the breach of contract. How serious is the breach? Does it amount to a repudiatory breach, such that the other party is entitled to terminate the contract. Does the contract itself say anything about the consequences of the breach?
    • whether the contract contains a ‘dispute resolution’, ‘arbitration’ or similar clause, and the impact of the same; and
    • whether any steps can be taken to mitigate / minimise the other party’s loss that flows from the breach. Are there any steps that can be taken to work with the other party to limit its loss and thus any potential claim?

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What practical steps can I take right now on my commercial contracts?

Answered 26 March 2020

Rather than waiting until you need to rely on force majeure or frustration, we recommend engaging with suppliers and customers to start discussing Covid-19 and its implications. You might be able to discuss a possible renegotiation, or postponement of obligations. Be aware that in order to be effective, many contracts will stipulate that variations must be in writing.

You should also consider the longer term implications of relying upon force majeure. When the outbreak is over, you will want your suppliers and customers to be in a good position and to still have a relationship with them.

It might be preferable to use your contractual right as a bargaining chip rather than actually acting on it – in other words, discuss reducing / modifying your obligations rather than avoiding them completely.

You might also find you are able to perform some, but not all, of your contractual obligations. In this case, you should consider the terms of each contract carefully and balance the pros and cons of:

  • partially performing all;
  • performing those that bring the most benefit; and/or
  • performing the contract that carries the greatest risk of being successfully sued if breached.

Legal advice is necessary when trying to calculate risk under (c) above, but (a) and (b) are largely commercial considerations.

What can I do to limit my risks related to Covid-19 in new contracts?

It is also worth considering the force majeure clauses in any contracts you enter into over the coming months. For the avoidance of any doubt, it would be sensible to expressly refer to Covid-19 in any definition of force majeure event.

https://www.hcrlaw.com/blog/how-will-the-covid-19-pandemic-affect-my-commercial-contracts/

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What key terms do I need to look out for in SaaS agreements?

Last updated 1 April 2020

When a customer buys SaaS, it will either be ubiquitous or more of a ‘specialist enterprise’ application. An example of the former is Skype or Zoom; these are not likely to be business critical and agreements will be extremely difficult to amend/ negotiate. The opposite can be said when purchasing enterprise software such as Customer Relationship Management (CRM) and you should consider the following key terms:

  1. Integration with other systems – Technical due diligence is required where a new SaaS system needs to integrate with existing software. Duties must be evidenced clearly in your agreement.
  2. Data protection – Check that the supplier has adequate safeguards for data protection purposes as the potential risk of a data breach is high.
  3. Consider duration – Some SaaS agreements will be created on a rolling basis with the service ceasing when you stop paying. Others will run for a fixed term. You should consider whether the software you use is business-critical. If so, you are likely to prefer an agreement with a long term and a long notice period.
  4. Obtain clarity on the services being provided – This is important so you have an understanding of the key deliverables.
  5. Ensure you have sufficient support and maintenance – Ask suppliers whether support and maintenance is covered in the price being paid. It is imperative you have the right support to fix any bugs or errors.

https://www.hcrlaw.com/blog/covid-19-and-saas-the-invisible-cloud-supporting-businesses-what-do-you-need-to-know/

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Can the build team charge for the extra costs if we continue building with social distancing measures in place?

Last updated 27 March 2020

This article was written with specific reference to the construction industry but the guidance may be useful to all businesses.

Who pays for extra build costs on JCT contracts during the Covid-19 pandemic?

Force majeure and exercise of statutory powers may entitle a contractor (and sub-contractor) to the right to extra time but not extra money as neither are Relevant Matters.

There is no automatic right of suspension for either party due to force majeure but an employer under the Design and Build form may postpone the works (clause 3.10). Use of these rights does grant the contractor a right to claim extra time and money under clauses 2.26 and 4.21 respectively.

How could social distancing requirements affect site access restrictions and my contractual obligations?

Changes under the Design and Build main and sub -contract (or ‘Variation’) include the imposition of any restrictions in respect of access to the site or use of any part of the site, and limitations of working space or hours. This means that even if not directly required by an instruction, it is work which under the contract is to be treated as a Change and valued as such. This too could form the basis of a claim for an extension of time as being a Relevant Event. It is therefore arguable that if the Employer or Main Contractor should have adopted different working practices or instructed site practices such as to conform to the Social Distancing guidance, then the subcontractor or contractor can claim for the increased costs of carrying out the work in the new post Covid-19 world that we now exist in.

Even if the contract does not contain such a provision it is entirely feasible that the Employer or Contractor are under an implied obligation to issue such site and access restriction instruction/variation. In some situations, there may be an implied duty for the employer to issue a variation instruction where it is impossible, in the absence of a variation, for the contractor to complete the works: North West Metropolitan Regional Hospital Board v T A Bickerton & Son Ltd [1970] 1 All ER 1039

Importantly, if an extension of time is obtained through means of force majeure, a contractor would not be entitled to claim loss and expense since force majeure is not a ‘Relevant Matter’. Changes in law and site restrictions on the other hand may give rise to an entitlement to claim loss and expense under the Relevant Matter provisions of the contract.

Who pays for extra build costs on NEC contracts during the Covd-19 pandemic?

Compensation Events under Clause 60.1(1) of the NEC3 and NEC4 contracts gives rise to an extension of time as well as compensation f for instructions that changes the Works Information / Scope, which may be relevant; also under clause 60.1(4) an instruction given to stop work is a compensation event.

Alternatively, clause 60.1(19) gives guidance about a compensation event. It is an event that:

  • prevents the completion of the whole of the works, or
  • prevents the contractor from completing the works by the planned completion date shown on the accepted programme,
  • and which:
  • the Contractor could not prevent, and
  • an experienced contractor would have judged at the time of contract to have such a limited a chance of occurring that it would have been unreasonable to have allowed for it.

Obviously, as it is the NEC, the proper operation of the early warning notice procedure at clause 15.1 is crucial and should be followed and any notice of a compensation event must be given under clause 61.3 within the required eight weeks period. Those time frames may well be a point of argument as to when Covid-19 should have been identified as a possible “event” , particularly with the lack of clarity from various governments around Social Distancing and what are “essential services” regarding working on building sites.

http://www.hcrlaw.com/blog/what-impact-does-social-distancing-have-on-the-performance-of-your-or-your-sub-contractors-works/

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