YOUR CONTRACTS AND COVID 19 – WHAT’S THE LAW?
1st April 2020
Whether you’re a purchaser or supplier of goods or services, it’s difficult to know where to start when you’re in a situation that feels more like an apocalyptic movie.
Endless Brexit commentary has swiftly been replaced with coronavirus advice so let’s take a look at it from a legal standpoint.
What can the law do to help you to hold on to the benefits of those precious contracts you’ve fought so hard to win? Conversely, what about those you now want to escape from?
Here are some tips when it comes to your contractual rights and obligations:.
1. Contracts are not about fairness. They reflect an intention by arms-length parties to be legally bound. Subject to certain exceptions (with some outlined below) they impose strict liability and are essential tools in our economy. If you have agreed to something, the law expects you to stick to it. Courts will either make you perform or expect you to pay something for your non-performance.
2. Contracts are not about punishment of the contract breaker. We are not looking at criminal law here. If I break my contract with you, the law looks to put you where you would have been if I had stuck to the deal - nothing more, nothing less. This can have some odd results such as contract breakers doing hard-nosed calculations or landing lucky and actually making a profit from their breach, but let’s not go there today!
3. So what are you looking for? Take the time to sit down and read (perhaps for the first time) what your contract actually says. There is some limited scope for the Courts implying terms that are not there in writing and there are statutory obligations the contract cannot side-step but, broadly, always start with the written word. Check if the obligations you and the other party are stuck with are truly absolute obligations. They may be hedged with words like “best endeavours” or they might be subject to provisions (for example ‘I’ll perform X but only if you have firstly done X). Or they may be subject to one party’s prior consent. Read the words carefully because, for the most part, those are what the Court will enforce.
4. What else might be in the contract? Force Majeure? A so called force majeure clause can help – and be mindful that it must be in your contract as it will not be implied. Next, check what this clause expressly covers. Acts of God, strikes, governmental action – hopefully there is even express mention of pandemics. If a FM clause is there it could be an opportunity or a disaster for you. If you want the contract to end or be suspended, the FM clause should not only say what it covers, but also explain what the consequences of the FM are to be in your particular contract. This could range from downing tools for a period to terminating the contract altogether.
5. Why might a (less than perfect) FM clause be a disaster? Firstly, if you’re depending on performance and have, as part of a wider supply chain, entered a different contract based on your expectation of timely performance, suspension of the other party’s obligations to you could be disastrous elsewhere in your supply chain. This is especially the case if those other contracts give you no such FM clause or leeway. Secondly, and potentially more importantly, it might close the door to other remedies. If the parties have taken the time to negotiate/agree a FM provision, it may lead a court to ask why a judge should intervene beyond the FM clause simply because some other event or set of circumstances has made everything so different to what the parties envisaged.
6. Which brings us to Frustration - This has nothing to do with frustration in the usual sense – rather, it is a legal concept which might help you escape your contractual obligations. It’s unlikely to help if your contract has a FM clause. In essence, it requires you firstly to establish that something unforeseen and not caused by the parties has occurred. So, for example, with a contract from last summer, COVID-19 might interest the courts – whereas a contract you entered this February probably won’t. Note also that the unforeseen circumstance must make performance of the contract if not impossible then radically different to what was envisaged when the contract was signed.
7. Is fairness always irrelevant when a contract is in place? Not necessarily. Firstly, if one party is a consumer, most (but not all) of the contract terms need to comply with good faith and be fair in that sense. Moreover, but we will cover this in a separate note, consumers who bought goods or services in their home or remotely (post, phone or online) will have a variety of rights including the right to cancel the contract. Many have heard of the 14 day right to cancel but, if the business failed to give certain information before or as the contract was made, that 14 day cancellation period can be extended by 12 months, Secondly, while UK courts have been reluctant to recognise duties of good faith in typical business-to-business contracts, they have (very) occasionally found “piecemeal solutions” to patently unfair provisions and looked for parties to be open and observe some principles of fair dealing. Also, the expectation of good faith in certain English law contracts (of which there are many involving Scots businesses) has emerged in certain so-called “relational contracts”. For example, a group of sub-postmasters used it (and other arguments) to defeat the Post Office which, rather than acknowledge its accounting IT was at fault, stigmatised the sub-postmasters.
8. Which side of the fence are you on? If you want to hold the other party to the deal, the last thing you want will be escape mechanisms like those above. Conversely, you may benefit if your business faces failure if it is made to perform its contract or pay damages?
9. Talk it out. While not strictly a legal point, it’s an important one to mention, as there are so many questions around COVID-19. While not always appropriate, it’s amazing how often talking to the other party can help. For example, if your business has sold vouchers to be reclaimed within a time period, might being proactive and offering to honour the voucher for another year resolve the problem? Or take weddings for example - couples who have booked weddings will, in the main, still want to get married once the crisis is over so, cash flow permitting, why not agree and bank a postponed wedding date rather than asking the couple to pay a cancellation charge? An open dialogue can sometimes be a good way to find an amicable solution that suits both parties.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at April 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.