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COVID-19: Can I furlough our commercial contracts? COVID-19: Can I furlough our commercial contracts?

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May 20

COVID-19: Can I furlough our commercial contracts?

Written by Jonathan Mortimer

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

The lockdown has caused havoc for many businesses with little advanced warning.  One of the key issues effecting businesses is how their ongoing contracts are effected – importantly whether there is an obligation to carry on with their contract or whether the commercial relationship is effectively furloughed.

The answer to this question lies in the terms of any written contract and whether there is something called a force majeure provision.  Such terms will typically excuse you, your customer or trading partner from performing contractual obligations if prevented from doing so by circumstances outside their control.

The term is often defined by reference to a list of categories of events which may include a pandemic, a change of law or regulation, or a prohibition by the government.  Often there will be express obligations on parties to take reasonable steps to mitigate the impact of the force majeure event such as resequencing work or implementing a business continuity plan.

Consequently, there is not a standard clause as such and the wording of each contract has to be considered with care.

But what if there is not a written contract? This is a complex legal area of something called ‘frustration’ but in summary it is only in exceptional circumstances that a party can walk away from the contract, even if the contract is more expensive to perform, perhaps because of additional expenses incurred in securing a safe working environment for staff.

So what issues are there now that we are hopefully coming out of lockdown ?

It is important to look out for contracts which have only been paused as a result of a lockdown.  This is on the basis that there may be a contractual obligation to resume performance of the contract now that restrictions have been lifted by you or your customer.

Businesses also need to plan contractually now.  This means ensuring that any new contract you enter into deals with the worst case scenario of restrictions being imposed in a second wave of the virus by spelling out what the consequences are.

Businesses also need to watch out for contracting parties who are using the virus as an excuse to get out of unfavorable contracts.

Understanding and foreseeing contractual obligations is key since a misjudgment could result in a claim for losses experienced by your trading partner.

For  more information contact Jonathan Mortimer at Raworths.

Published on 29 May 2020

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