Managing Contractual Disputes During the COVID-19 Pandemic: Considerations to Make

Managing Contractual Disputes During the COVID-19 Pandemic: Considerations to Make

Many sole business owners will be finding times tough at the moment. The COVID-19 outbreak has meant many have had to close or suspend their business if they’re unable to work from home or considered as a ‘non-essential business’. 

The outbreak was unexpected and understandably it has disrupted the functionality of many business processes. Understandably, contractual agreements will still be in place despite the times we’re currently in, meaning disputes are likely to arise around delays, hindrance with performance and possible breaches being made with the current agreements.

If you are in partnership in your business, there may be instances where certain contractual agreements or common law principles are in place that can avoid you being negatively impacted.

Are you aware of the force majeure clause?

Force majeure is one contractual agreement that can be put in place. The force majeure clause allows a party to suspend or terminate a contract without penalty where events have occurred beyond their control that have impacted their contractual obligations. It must be noted, however, that this agreement must be clearly defined in the contract. A business being able to terminate via a force majeure clause relies heavily on the wording. 

The contract can also outline the specific events where the force majeure clause comes into question; or more generally acts that fall under the category of ‘state or governmental action that prohibits or impedes any party from performing their respective duties’. In such cases, there are considerations to make:

– Is COVID-19 classed as an act related to the force majeure clause?

– Would hindrance of performance be the main purpose for the clause to be triggered?

– Is performance classed as impossible to perform?

– Are there any steps that either of the parties can take to prevent the triggering of the clause?

– Will there be any consequences for triggering it? 

– If performance will be inhibited for a long period, is there a right in place to terminate the contract?

– What impact will this have on the wider supply chain?

Can the contract be frustrated?

Another circumstance where a contract dispute could arise if either party chooses to frustrate a contract. This can be considered if the party concludes that their responsibilities within the contract have been impacted by COVID-19 and it’s physically impossible to perform the role, or alternatives are illegal or differ substantially from the original agreement.

If a frustration of a contract is accepted, the termination can occur automatically. However, according to many dispute resolution solicitors it can be difficult to argue a termination of contract through frustration. This is because the threshold is considered reasonably high and financial losses can sometimes not be considered enough to frustrate a contract.

Is there a Material Adverse Change clause in place?

Material Adverse Change clauses can be another angle where a contract can be disputed. However, this can prove difficult to action considering they rely heavily on how they’re worded and the circumstance it’s based on.

If a situation arises where parties are looking to dispute a contract based on Material Adverse Change, there are considerations that need to made:

– What is the triggering event?

– Will there be any commercial complications of triggering the clause?

– What are the disadvantages of the clause?

Try to mitigate risk of COVID-19 as much as possible

In an ideal scenario, business owners should look to mitigate the risks of COVID-19 as much as possible to prevent such contractual disputes arising. This may prove difficult for many, however, which is why you should be more aware of managing contractual disputes.

It is very important that if considerations for contracts are made, parties should not look to vary the contract or waive any rights that you have whilst exchanging correspondence related to COVID-19. If a party suggests changes in a contract that you’re not comfortable with or feel would have a detrimental effect on your business, ensure a response is documented declining such changes.

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