With “freedom day” in England now behind us, nightclubs and sporting events are free to operate at full capacity, face masks are no longer mandatory and we are no longer advised to work from home. However, the UK government is nevertheless calling for caution as new Covid-19 cases continue to dominate our headlines. So, whilst we may feel that we are heading back to our “old ways” what we are actually being asked to do is adapt to our “new normal”.
Covid-19 has caused us to take stock of many aspects of life and our commercial contracts are no exception. At the outset of the pandemic, businesses looked to their contracts to see what the legal consequences were of an event arising which was outside the control of the parties - an event of ‘force majeure’. What was rarely a negotiated clause was thrust into the spotlight as challenges to contract delivery and payment pressures came to the fore. Where an event of force majeure did not provide relief from performance under a contract, other remedies such as frustration and illegality were considered outside the confines of the express contract drafting.
Covid-19 has challenged us to create better and more flexible contract mechanisms to deal with the greater uncertainties that this pandemic has brought – whether that be with the availability of employees to deliver our services, the reliability of our supply chains for our manufacturing or the capability of our technology to support our businesses now operating from a more fragmented geographical base.
We need not rely on a force majeure clause alone; we can also look to future proof our contracts by building in mechanisms that allow contracts to adapt to the challenges that a pandemic brings. These mechanisms can include:
- Adjustments to payment provisions – an inability to trade for any period has an immediate and direct impact on cash flow. Contracts can contain varied payment provisions and obligations that need to be met. Force majeure clauses commonly exclude their operation where payment obligations are concerned. One mechanism which may be used to address the uncertainties of force majeure drafting is a ‘material adverse change’ clause. Such a clause may allow a party suffering financial hardship to seek a contract change to payment obligations which allows the contract to continue but mitigates the immediate impact of the cash flow crisis.
- Additional termination provisions – force majeure clauses often contain an express right to terminate a contract where a force majeure event continues for a specified period. However, in order to invoke this termination right, the party intending to rely on the event must generally meet certain criteria which make it more difficult to successfully rely upon. Express termination rights which can be invoked applying different qualifying criteria may well assist parties to bring an end to a contract that no longer delivers the required benefits.
- Service levels adjustment and service credit relief – service levels are commonly used in contracts to gauge the performance of a service provider. Resource pressures can mean less responsive services and a mismatch between a customer’s service expectations and a supplier’s continuing ability to deliver customer satisfaction. Contract drafting can allow for regular reviews not only of performance against targets, but also of the measures themselves and their on-going ability to fully reflect the customer’s objectives and the challenges of the changing service delivery context.
- Business continuity requirements – contract obligations should be considered which require business continuity planning and testing, covering risks around infrastructure, employees, business, operations and communications. Plans should also be put in place with key suppliers where supply chains rely on them and be aligned with any applicable requirements from insurers and accreditation bodies.
- Governance structures – specific thought should be given to the forms of governance which may need to be implemented speedily should a party’s business be further impacted by Covid-19. A multi-party board capable of speedy mobilisation and streamlined decision making may well assist during business interruptions caused by Covid-19.
The Competition and Markets Authority (CMA) has provided its views on how the law operates for consumers where contracts are affected by the impact of Covid-19 and there are proposals to broaden the CMAs enforcement powers. In its view, rights to a refund will usually apply even where a contract states that a deposit is non-refundable or is an advance payment. Admin fees for processing refunds should also not be charged. Careful use of the mechanisms above should also assist to ensure that contracts with consumers reflect the necessary requirement of fairness and should be reviewed to ensure that they reflect current best practice.
Making good use of these mechanisms, combined with a robust force majeure clause, will help to future proof business arrangements and promote the stability required to adjust to the new normal in which we find ourselves.
For more information on how to protect your business and ensure your contracts are robust, please contact Howes Percival’s Head of Commercial, Paula Dumbill on 0116 3230540 or at [javascript protected email address].
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
