COVID-19 - CONTRACTUAL AND LEGAL CONSIDERATIONS
With the increasing volume of cases and extensive media coverage, there is no doubt Covid-19 represents a significant risk to businesses across the globe. Businesses will inevitably be impacted and will need to plan to minimise and mitigate the risks Covid-19 poses to its business continuity but at the same time protect the health and safety of its employees and their families.
ISSUE MANAGEMENT GOVERNANCE
Putting in place an effective Issue or Risk Management Plan across any large international company has significant challenges. Getting this governance framework in place right from the start (even if it takes a little time) is critical. Members of our team here at HGF have had many years in-house and industrial experience and have provided legal support in the set up and management of Central Issue Management Teams on many occasions. They have seen first-hand that even the best considered plans will only ever be as good as the manner in which they are consistently and swiftly distributed to the right functions and locations of the business and to the right people who have both the ability and authority to act. A clearly structured team, regular contact, appropriate documentation of messages (internal and external) with a clear timetable of actions is key. Without this, inconsistent or confused messages, uncertainty around who has the authority to direct, internal delays, inappropriate or inaccurate documentation (or publication) of the company’s position and the distribution of incorrect external message to partners can cause even greater risk to an organisation and damage to its reputation.
CONTRACTUAL AND LEGAL CONSIDERATIONS
We have put together, from an English law perspective and as at the above date, a summary of the key contractual and legal issues which will need to be considered as part of any company’s broader Issue (Crisis) Management Plan.
Identify, calibrate and review
The first step will be to identify the company’s material supply chain relations and apply a form of calibration from ‘high’ risk to the business through to ‘low’ risk to the business. Priority can then be applied accordingly. The contracts or terms supporting the relations will then require review.
Things may not be so clear cut where there is potential for both sides to argue that their terms apply. The ‘Battle of the Forms’ would apply in these cases and you will need to look at (amongst other factors) which party provided the last express set of terms. Where there are no terms in place, things get more complicated – you may need to consider what the parties have said and possible implied terms. Having said this, in practice there may not be time and it may be better to initiate contact straight away.
Is there scope for delay or interruption?
Whether a company is supplying or receiving goods and services, the first point to consider is how strict are the obligations to deliver. Where there is an absolute obligation, or reference to time being of the essence, any delay could trigger a breach. Where ‘All’ or ‘Best’ endeavours are required there is little scope for delay, however, commercially reasonable or just reasonable endeavours does give a degree of scope for delayed or non-delivery. Check termination provisions carefully, in some cases a contract may allow for immediate termination upon notice for any delay in performance.
Under English law, generally, a party which fails to perform its obligations under that contract will be liable to the receiving party in some form. The two key exceptions are (i) the operation of a force majeure clause in the contract; or (ii) the common law concept of frustration.
Force Majeure clauses differ considerably from contract to contract and under different legal systems. We are considering the position under English law but it is important to check the governing law of the contract as this could mean it would be treated differently.
When looking at a force majeure clause the exact wording will need to be considered and whether the clause, as drafted, grants sufficient relief. Clauses often refer to circumstance not within a party's reasonable control and then provide a list of specific examples. Key points to look out for are:
- Are the events preventing delivery or supply actually referenced as an event? The term ‘pandemic’ is routinely referenced although at the time of writing this may not necessarily include Covid-19;
- Even if not expressly referenced as an event, consider whether the more generic wording within the force majeure clause may be useful. This often captures governmental or regulatory impositions or political measures which may apply and could include the restrictions on movements put in place by authorities, site closures, supply chain blockages elsewhere, staff shortages or shortages caused by self-isolation;
- Consider whether the force majeure is subject to reasonable/foreseeable steps which should be taken to avoid the effect of the event? Consider whether steps have indeed been taken and whether, based on the circumstances, these may be considered reasonable;
- Often the party relying on force majeure will have to prove a direct link between the event and the performance failure. Check the wording to see whether performance needs to be made impossible or just difficult, if the former, there may be the expectation that alternative staff could have been sourced or alternative sites and equipment used to mitigate against the impact. This can often apply even if the costs for obtaining alternative staff/resources is higher;
- Expect that you may need to provide formal evidence of any mitigating steps which have been applied to minimise or avoid the impact of the force majeure event. Ensure records are appropriately made and held by the relevant teams;
- Check whether there is a requirement to provide notice of the force majeure event. Quite often notice has to be given within tight timescales and in a particular format. Missing deadlines could make the trigger ineffective;
- Check what the consequences of triggering force majeure are as this could include an immediate right to terminate the contract. If this is not what is desired it is important to initiate discussions around a plan of action at the same time as the trigger;
- Sometimes a trigger will relieve performance but only for a limited period of time after which termination of the contract may be possible. Consider whether an extended period may need to be negotiated to reflect the circumstances;
- Consider whether costs are referred to in the force majeure provision. Often parties may be expected to pay their own costs arising from the force majeure event but in some cases one party may be expected to pay or compensate the other.
Frustration of Contract
In the absence of an effective force majeure provision, where a change of circumstances makes it physically or commercially impossible to perform or radically alters performance, the contract could be argued to have been discharged, i.e. performance excused, due to the ‘frustrated circumstances’. The tests for ‘frustration’ to be invoked by a court are especially high, for frustration to be claimed the frustrating event should:
- occur after the contract has been formed;
- ‘strike at the root of the contract’ and be entirely beyond what was contemplated when the parties entered the contract;
- not be due to the fault of either party;
- make further performance impossible, illegal or radically different from that contemplated by the parties at the time of the contract.
As with force majeure, the exact circumstances and events that are likely to or have occurred will need to be considered and care will need to be taken that the correct event leading to the right to claim is identified. It is possible that in some circumstances, especially where the ‘frustrating circumstance’ may be due to impositions from the state, government or regulatory authorities, Covid-19 could present the basis for a claim for ‘frustration of contract’. The Law Reform (Frustrated Contract) Act 1943 can allow, in certain circumstances, recovery of payments made under a contract before it was ‘frustrated’ and discharged.
Recovery of costs
The contract or terms between the parties should be considered to assess what is potentially recoverable in the event of a claim for non-performance or delay. A few points to note are:
- There may be provision for penalties or liquidated damages but care should be taken here as if these are not genuine pre-estimations of a party’s loss, they may be considered a penalty and unenforceable under English law;
- Consider any exclusions and limitations of liability (including monetary caps) as these may impact the types of losses that can be recovered as well as the potential of damages;
- Check for any indemnities included in the contract. Where broadly drafted these may allow a wronged party to recover a greater scope of damages and may also offer a level of protection from third party claims. This could be relevant where there has been a knock-on supply chain failure.
Contractual notice clauses, governance and dispute resolution provisions
Notice provisions in any agreement should be carefully checked to ensure effective service and that relevant time frames are complied with.
It is likely that there will be some level of debate around any of the points highlighted in this note alongside other matters. Check the governance and dispute resolution procedures carefully to make sure you are prepared and follow the set procedures or have time to agree alternatives. There may be an escalation process to follow, alternative dispute resolution and the governing law and/or jurisdiction may become relevant quite early on. In these circumstances getting local legal advice in place early would be advisable.
At all stages, keep in mind the importance of the maintenance of any particular business relationship. This may involve considering whether the third party provider/customer/partner is also involved in and important to other areas across the business. Engagement in discussions at the earliest opportunity and agreeing a co-ordinated action plan with your provider/customer/partner to navigate the ‘turbulence’ Covid-19 will bring may present the most effective and least disruptive option for the business.
Alongside your consideration of the contractual and legal issues above it will be critical to fully review your insurance policies and initiate early discussions with your insurers as appropriate. Insurance policies will have their own set of caveats, restrictions and processes to follow which will not all naturally follow the manner in which your contracts will apply to Covid-19.
This is a general briefing note and specific legal advice should be sought in connection with any particular contract. Should you have any questions concerning this note, please contact Michelle Davies or James Talbot.