Managing Contractual Relationships – Updated

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Force Majeure

Force majeure, which generally allows a party affected by an event beyond its control to suspend its obligations without penalty, is not defined under common law. It is a type of clause that must be expressly included in a contract, it cannot be implied. A party’s ability to rely on a force majeure clause will depend on the contractual wording.

The contract may list specific events that equate to a force majeure, or it may include more general definitions such as: acts of state or governmental action prohibiting or impeding any party from performing its respective obligations; or “causes beyond a party’s control”, or an “Act of God”. In any event, you should consider:

  • Does COVID-19 fall within the definition of force majeure used in the contract?
  • For the clause to be triggered, must performance of the contract be “prevented”, “hindered” or “delayed”?
  • Is performance legally or physically impossible (not just difficult or unprofitable)?
  • What steps can the parties take to avoid a declaration of force majeure?
  • What are the consequences of triggering the clause?
  • What steps should the relying party take?
  • Will prolonged inability to perform the contract lead to a termination right?
  • What will be the impact on the wider supply chain?

Frustration

It may be possible to argue that the contract has been frustrated by events which flow from COVID-19. These events must be beyond the contemplation and control of the parties, and performance of the contract must be “impossible, illegal or radically different from what was originally contemplated by the parties” when they entered the contract.

If the contract is frustrated, the contract is terminated automatically. The threshold to successfully argue frustration is high, difficulty and financial losses are unlikely to be enough to frustrate the contract.

Material Adverse Change

Material adverse change clauses turn heavily on their wording and the specific circumstances. If you are looking to rely upon them where unable to perform your obligations under the contract, you should read them carefully and consider:

  • What are the trigger events?
  • What are the commercial implications of relying on this clause?
  • Are there any disadvantages?

Mitigation

Parties should look to mitigate the impact of COVID-19 as much as possible, but it is essential to ensure that they do not vary the contract or waive their rights when exchanging COVID-19 correspondence. If the other party to the contract is proposing changes that you are not comfortable with, or you feel will be detrimental to your business, you must respond in writing to any such proposals expressly rejecting them.

Guidance on responsible contractual behaviour

On 7 May 2020, the Cabinet Office released guidance for parties to contracts impacted by COVID-19. The guidance strongly encourages contractual parties in England to act fairly and reasonably in the national interest when performing and enforcing contracts.

While the guidance does not apply to the devolved nations, as most contracts are governed by the laws of England and Wales, it would be sensible for Welsh companies to comply with it too.

The Government has recognised that parties to some contracts might find it difficult or impossible to perform their contractual obligations due to COVID-19. It is therefore urging responsible and fair performance and enforcement of contracts during this time, for example in relation to:

  • Requesting and giving relief for impaired performance, including time for delivery and completion.
  • Requesting and allowing extensions of time, substitute or alternative performance and compensation.
  • Making and responding to force majeure, change in law, relief event, delay event, compensation event and excusing cause claims.
  • Making and responding to claims for damages, including under liquidated damages provisions.
  • Making and responding to requests for contract changes and variations.

The guidance has general application to all active contractual arrangements in England, but, crucially, it is non-statutory guidance only and does not override the general law. However, that doesn’t mean it should be ignored, as the guidance is likely to be raised by parties who are looking for a “fair and reasonable” response to a proposal in respect of the contract and may have considerable “moral pressure”. Not following the guidance and acting unreasonably also has potential public relations consequences.


Here, Stephen Meade guides you through the clauses and common law principles that can protect you from breach of contract.