Coronavirus (covid-19) update - impact on contracts, suppliers and customers
What happens if I cannot fulfil my obligations to my customer or my customer cannot pay me? What happens if my suppliers cannot supply me?
By now we have all worked out how to keep our colleagues, customers, and contacts safe and how to manage employees. I hope the email we sent on 23 March helped.
Now we need to keep our businesses going. These two questions are amongst the most important we have to address and the answer to them lies in the law of contract.
Remember, a contract is simply an agreement that is enforceable at law and that you can have an agreement even if there is nothing in writing. All businesses depend on contracts and many of them are made without any formalities. Long term contracts to supply or be supplied are sometimes an exception to this.
See our Blog Post ‘The Accidental Contract.’
What do I do if I cannot fulfil my obligations to my customer?
For example, do I still have to send him some goods, deliver on schedule or maintain the equipment etc. etc. even though my staff are in lockdown?
Try and come to an arrangement with your customer or supplier to vary your contracts in a way you can both live with.
The normal rules of commercial relationships seem to have been suspended, for the moment at least. Many people are negotiating postponements of their obligations and payment holidays in these extraordinary times. Usually this is genuine generosity in difficult times and it almost always makes commercial sense for both sides. We will all need our supply chains once the current crisis is over.
You will know the strengths of your bargaining power better than anyone but reading the rest of this note may give you some ideas that help you in those discussions.
What happens if my customer cannot pay me?
Sometimes you will find people asking for concessions they do not really need. We have seen this at least once already.
If this happens they will continue to pay themselves or others rather than pay you. You can almost certainly sue for your payment but is this a case of ‘can’t pay or ‘won’t pay’? Is your customer willing to disclose their financial circumstances to you so that you can decide which of the two apply in your case?
What if my supplier cannot supply me?
Again, try to come to some arrangement. These are extraordinary times and we all want to do what we can to help and maintain our businesses. More to the point we are being forced to be inventive in our solutions and work in very different ways.
If you come to a deal that changes the obligations under a contract set it out clearly in writing, in an email to the other party, at the very least. Some contracts can only be altered (‘varied’ in legal speak) in very specific ways by following an agreed procedure. If that is the case with your contract, make sure you follow what you have to do to the letter.
Your rights and obligations
Both your rights and obligations depend on the details of your agreement.
Is there a binding contract at all rather than an agreement that can be enforced at law, or no real agreement? Probably, but it is worth checking.
What are the terms of that agreement? Read the emails that led to the sale. Check the purchase orders, acknowledgement of orders, invoices, and any other contractual documents for references to terms and conditions.
Find and read any terms and conditions of the deal or the written contract.
Is there a right to end (‘terminate’ in legal speak) either the contract, or the obligation, simply by giving notice? There sometimes is, especially if the contract covers a long period of time and has been professionally drafted and negotiated.
Even if there is a right to give a notice, can you terminate the agreement if your supplier breaks the agreement? Sometimes. If a special type of contractual obligation has been broken (known as a condition) or if what the other party has done goes to the heart of your relationship with him, then you probably can terminate the contract.
Do you want to terminate? Is it in your interests to do so? Consider the alternatives carefully.
Before you do terminate the agreement make sure you are on solid legal ground as getting it wrong can be expensive.
Look for the ‘force majeure’ clause in the contract terms which may give you different options. Professionally drafted terms usually have these clauses and they are often tucked right at the end. ‘Force majeure’ clauses are intended to give the parties to the agreement a way out of the contract in specified extreme circumstances. Do the circumstances of your contract include pandemics? Few will refer to them specifically but are the words wide enough to include it such as ‘circumstances beyond the parties’ control’?
The contract terms may require you to serve any notices on the other side and to do it in a particular way before you can terminate the contract or operate the force majeure clause. Read the contract and find out what you have to do, or your notice will not be effective.
Frustration
And finally, there is frustration. Not the feeling we all have from being cooped up at home, but the contractual doctrine that says that if external circumstances change to make performing a contract radically different, then the contract is discharged. Not suspended, discharged so that it cannot be resumed after the pandemic is over and you will have to renegotiate with your customer or supplier.
The key words are ‘radically different.’ It has been difficult to date to persuade a court that a contract has been frustrated. It needs to be all but impossible to perform the contract for this rule to apply. It is not enough to show that the pandemic makes it more expensive to perform an obligation; the parties are expected to absorb that risk. Unless, for example, yours is one of the businesses that the government has ordered to close, a vital national border has been closed, or transport has become impossible. It is unlikely that you will come within this rule but if none of the other options are available you may want to consider it very carefully.
If you need specific advice, please contact us on 01530 266 000 or email Andrew Shipley.
