Have You Updated Your Commercial Contract Terms After Covid 19? Why The Small Print Matters.
Review your standard contracts or T&Cs
The way in which we do business has changed as a result of the pandemic, and businesses need to ensure that they have adapted their trading terms to fit the ‘new normal’. It is important to review your standard business contracts or terms and conditions (T&Cs) in order to minimise the future effects of a pandemic or events beyond your control.
Most businesses will have standard boilerplate T&Cs which may have been in place for years, but it is advisable to review these to take into account how major intervening events could frustrate contracts, for example governmental interference, pandemics, natural disasters, and other supervening events.
Each business will have different considerations depending upon which party is being advised. For example, a supplier will need to consider if it can avoid its obligations in the event of a supervening event such as a pandemic or disaster, whereas a buyer of goods or services may wish to continue to meet its obligations to its customers and will look to a force majeure clause to enable it to continue transacting the business.
Force majeure clauses are important
While there is a common law doctrine of frustration which may apply where an unforeseen event has made a contract impossible of performance, the doctrine is very difficult to establish and has been construed very narrowly by the Courts. So businesses need to rely upon specially designed force majeure clauses in their contract terms.
They are important because they make provision on the happening of a specified event or event beyond the control of the parties including:-
- Cancellation of the contract either automatically or at the request of one of the parties.
- Excusing the performing party from further performance of the contract in whole or in part.
- Suspending performance of granting an extension of time for future performance.
The effectiveness of a force majeure clause will depend on how it is drafted. The drafting is important since it will be strictly construed by the courts when deciding upon the rights and obligations of the parties. Careful attention needs to be given to various definitions including ‘pandemic’ or ‘epidemic’ using a definition that is generally accepted eg the definition adopted by the World Health Organisation which would be accepted in international contracts or where a party is reliant upon a supply from abroad. Even the definition of ‘force majeure’ needs to be examined since the long established definition of an event that ‘could not have been reasonably anticipated or avoided’ would not now cover a pandemic which was already known when the contract was entered into.
Even a strong force majeure clause is unlikely to give watertight protection covering all eventualities. A force majeure clause should be considered as just one of several clauses to cover potential outcomes of a disastrous or unforeseeable event. There are a range of contractual remedies to be included, but care should be taken to ensure that the various clauses in the contract are consistent and do not conflict with each other.
The usual remedies available to a party seeking the benefit of a force majeure clause can include suspension of the obligation to perform for a given period (usually the period that the force majeure subsists). Consider these points when drafting your contract terms:-
- Should the clause include a right to terminate if the force majeure event continues beyond a specified period?
- Should this right be available to both parties or just to one party?
It all depends upon what would be the best outcome for your business.
Is a force majeure clause enforceable in a BtoC contract because of Covid 19?
There are statutory provisions imposed upon businesses seeking to rely on force majeure provisions in contracts with consumers relating to delays in performance caused by Covid 19, or to relieve them of their contractual obligations. In particular, businesses must consider whether:
- the contract terms have been effectively incorporated into the contract, according to common law principles. You must show that the other party specifically agreed to, or knew of, the terms or that you have done what is reasonably sufficient to give the other party notice of them before formation of the contract. Failing this, the clause will not be enforceable against a consumer; and
- the terms are fair, as determined in accordance with the Consumer Rights Act 2015.
Terms in B2C contracts and to a lesser degree in B2B contracts, including force majeure clauses, are subject to the unfair terms provisions set out in CRA 2015. A term or notice is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. Terms which do not satisfy the fairness test are unenforceable against consumers. Therefore care must be taken in drafting clauses to ensure that they are fair and reasonable.
The Competition and Markets Authority (CMA) published guidance on unfair contract terms entitled ‘Unfair contract terms: CMA37’ (CMA Guidance). This includes guidance on the grey list and other potentially unfair terms and notices. Annex A of the CMA Guidance provides illustrative examples of wording which may regarded as unfair by the CMA.
Some other common issues arising from Covid 19 to be covered in your T&Cs
- Will you still be paid? Payment will depend on the provisions of the contract. This will be of particular concern where payment obligations are suspended during the period of force majeure. This could impact significantly on the cash flow of the business.
- Rights to terminate. Termination clauses typically deal with some or all of the following:
- automatic termination or expiry at the end of a fixed term
- allowing either party to terminate the contract at any time (eg on 30 days’ notice).
- termination for material breach; and
- termination in the event of insolvency or change of control of one of the parties.
- A hardship clause is useful where an agreement has become more difficult but the parties wish to work through their commercial options before terminating as a last resort. This obliges the parties to renegotiate the agreement in the event of hardship resulting from an event that occurred after entering into the agreement which has made the contract materially less beneficial or more onerous.
- Dispute resolution clause. Dispute resolution clauses describe how disputes arising in relation to an agreement will be handled and offer a mechanism to attempt to resolve disputes quickly and cost effectively without the need to issue proceedings in the courts or go to arbitration.
If you would like to review your commercial contracts or are need expert legal advice, please contact Alan Zeffertt by email on firstname.lastname@example.org or ask for a member of our Commercial Team; telephone 020 7940 4000.