Resolving contractual problems during COVID-19: Top tips at a glance

Introduction

In these unprecedented times businesses are looking for flexible commercial solutions to contractual problems. Use our ‘top tips at a glance’ to ensure you protect your rights, understand your options and identify potential solutions and opportunities. 

Problem arises under a contract

Contractual counterparty breaches an obligation (e.g. fails to supply goods; fails to place an order; fails to pay)

Contractual rights/remedies

Dispute resolution

• Check the governing law of your contract.
• Check the dispute resolution procedure – Court or Arbitration?
• Check formalities and time limits to ensure you do not waive your rights – do you need to notify a claim within a certain timeframe in order not to lose the right to pursue it?
• There may be contractual requirements to negotiate or mediate before you can issue formal proceedings.
• Mediation can take place in one day and can be done remotely by telephone – good option to resolve an impasse quickly.
• Proactively issuing proceedings to enforce your contractual rights may exert pressure and cause the counterparty to comply, or at least increase your leverage for any settlement negotiations.
• Consider timings and flexibility of Court/Arbitration proceedings in the current climate – cases being dealt with remotely where possible.

Other contractual rights

• Do you have a right to suspend payment while the counterparty’s breach is continuing?
• Do you have a right to amend the terms of the contract as a result of the breach?
• Is the counterparty subject to an express or implied (under a relational contract) duty of good faith?

Force majeure

• Can the counterparty rely on an express force majeure clause?A ‘force majeure’ event means unexpected circumstances outside a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations.
• This has been widely touted as the starting point for companies seeking to protect their position under a contract they are no longer able to perform due to the impact of COVID-19.
• Where a party is unable to comply with its contractual obligations as a result of COVID-19, provided the relevant contract includes a force majeure clause (and subject to its terms), service of a force majeure notice may effectively release a party from its performance obligations.

Frustration

• In the absence of an express force majeure clause, a party may be able to rely on the doctrine of frustration:
  

• A post-contractual event which renders performance impossible, illegal or radically different from that envisioned by the parties.

• Performance becoming more expensive or onerous is insufficient – a party let down by its supplier would be expected to source an alternate supplier even if this was more costly.

• If frustration applies, the contract is automatically discharged and the parties are released from future performance obligations.

Termination

• What are your contractualtermination rights?
• Is the counterparty inrepudiatory breach (striking at the heart of the contract) such that you can accept the breach, terminate and seek damages?

Protect your position

Whatever strategy you pursue, ensure that you reserve your rights in writing so as not to lose or waive the right to pursue a certain course of action later.

What steps can you take to mitigate losses (be aware of the English common law obligation to do so); think about the costs consequences and practicalities.

Strategic considerations

What would the impact of taking aggressive action (e.g. to commence proceedings or terminate) be?

Is your contractual counterparty unable to comply with its obligations due to legal restrictions in one or more jurisdictions? If so, consider whether you need to explore a joint approach to dealing with this issue, e.g. procuring supplies from a third party.

Think about the short, medium and long term impact of the actions you take on the business and your existing and future business relationships.

Other protections

Insurance – check your policy, what it covers and any notification requirements and timelines.

Government emergency COVID-19 financial intervention packages – can you take advantage of these?

Difficult decisions/thought process

If all contractual counterparties simply serve force majeure notices on each other or assert that the contract has been frustrated and so is discharged, commerce will grind to a halt.

Consider the knock on impact: How might issuing or refusing to accept a force majeure notice impact on your rights under other contracts if future disclosure reveals an inconsistent approach?

Whilst it may be necessary to issue a force majeure notice/reserve rights to protect your position, this is not the only way forward and there are other protections available.

Explore leniency options - e.g. is it possible to allow the counterparty more time to pay or supply/can you obtain a similar compromise further on in the supply chain?

Balance reputational issues associated with taking a hard line approach against leverage to be gained through cooperation and potential for further business opportunities.

Opportunities

Is this an opportunity to extend existing terms to obtain commitment/certainty moving forward, or to renegotiate unfavourable contractual terms?

Can you work together in a different way? Consider innovations and use of technology. Explore possible joint ventures or secondments to address shortage of workforce/expertise issues.

Be alive to CSR opportunities with a positive reputational impact - already examples of manufacturers from multiple industries flexing to produce hand sanitiser and hospital equipment and energy companies providing free fuel to the emergency services.

M&A opportunities arising out of distressed or insolvency situations.