Mar 20

COVID-19: a five point plan to mitigate the contractual implications for businesses

Written by Jonathan Mortimer
Consultant Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

6 March 2020

With the virus spreading rapidly, there is not only understandable concern as to the impact on public health but now the potential for considerable disruption to businesses in the weeks and months ahead.

In the early stages of the outbreak, it has predominantly been the motor and electronics sectors which had been impacted the most, as a result of China’s dominance in the market place.  However, it is now becoming clear that the virus has the potential to impact on all sectors of business.

The most likely problems will be shortages in staff, delays or no deliveries from suppliers, customers cancelling orders and an inability by your business to meet them.  The key legal question which all businesses must ask is what are the legal consequences for the numerous ongoing contractual commitments already in place.

For example, does the impact of the virus on your business enable you to suspend or terminate your obligation to a customer?  Alternatively, as a result of unexpected reduced customer demand, do you still need to accept delivery of stock ordered weeks ago?

The answer will only become clear on a thorough review of the contract and facts of the case.  Detailed written contracts will frequently have what is called a force majeure provision which will set out what happens next if a contract becomes impossible or commercially too onerous to perform due to matters beyond the control of the parties.  However, more informal contacts or those made orally are less likely to be specific leaving the affected party potentially exposed to a claim for non-performance regardless of the difficulties encountered.

There will also be added complexity with a chain of supply since each contract in the chain may be on different terms and potentially subject to different laws if other parties are based abroad.

All businesses should take these five steps urgently:

1. To check ongoing contracts to ascertain whether there is a provision which deals with a virus outbreak or similar act of God.
2. If so, to understand the implications for you or the other business e.g. who could pull out of the contract and what you should do next.
3. Not enter into any new contacts without checking that the terms provide for what happens in the event of the virus effecting ability to honour the contract by either party.
4. Speak to customers and suppliers as a matter of urgency to anticipate problems and possibly agree a variation going forward to avoid disruption and possible claims.
5. Check for business interruption insurance that may cover the disruption likely to be experienced.

If businesses plan and work together effectively we can attempt to mitigate the impact of this crisis.