Updating your commercial contract terms after Covid-19
Updated: Feb 8, 2021
Updating your commercial contract terms after Covid-19? 5 Clause provisions to consider post Pandemic
The shock of the Covid-19 pandemic on the economy is likely to be felt across all sectors for some time. It is critical for all business owners to review their standard contract terms to ensure that they remain fit for purpose in the post-pandemic world. The overarching purpose of a contract is to make clear to all parties to a contract of their contractual rights and obligations. In addition, a good commercial contract will set out the steps to be taken, by either party, when matters go awry. These terms are often at the end of a contract are often in standard terms developed over the years to cater for the “usual” challenges experienced in a commercial relationship.
1. Force Majeure clause
This clause is a standard feature in many contracts eg shipping but rare in others. If your standard terms do not contain a force majeure clause it may be prudent to consider inserting one. The force majeure clause describes events possibly affecting the performance of a contract and which are outside of the individual party’s control. The usual formulation lists specific events to which the clause will apply which includes Acts of God (eg a flood), fires and strikes. If the event falls within the list, then delay or failure to perform in terms of the agreement may be excused and not give rise to a claim for damages. It is vital that parties are aware of exactly which events will be considered force majeure and the procedural steps they must take to ensure that the challenges they are facing qualify for protection under this clause. It is important to bear in mind that the force majeure must render performance impossible not merely more onerous or expensive.
2. Jurisdiction clauses
Another common feature of commercial contracts is a jurisdiction clause which stipulates which country’s legal system will apply to the resolution of disputes. It should be borne in mind that while force majeure is governed by contract law (and the parties will be bound by their written agreement) other legal systems have detailed legislation defining how a force majeure event will affect the parties’ rights and obligations under the contract. If you are doing business with the EU countries EU Regulation 593/2008, known as “Rome I" may be of application. While, in the main it provides that the choice of law in the contract will prevail, in certain limited circumstances, if all the elements giving rise to the dispute have taken place in another country, that country’s laws may apply. Rome I is part of the United Kingdom’s domestic law and there has been no indication from the government that it intends to repeal its terms at the end of the Brexit transition period.
If you are regularly doing business with countries in the EU it would be sensible to review your contract provisions in the light of a possible conflict of laws brought about by lockdowns or other restrictions which may occur in the future.
3. Trigger clauses
The declaration of the pandemic and the subsequent lockdowns happened in fits and starts over an extended period. It is critical that, if you intend to insert “pandemic specific” clauses into your standard agreement, the agreement is clear as to what events will “trigger” their operation. In addition, the contract must be clear as to what steps a party affected by, for example, the declaration of a lockdown must take to notify the other parties to the contract that they are affected by a lockdown and/or restrictions.
4. Proof of hardship
The possibility cannot be excluded that parties faced with a more onerous or expensive contract to perform may seek to take advantage of a pandemic related lockdown or restriction to escape from the contract. Parties should consider including detailed provisions of what a party needs to provide as proof. It could be a copy of a formal regulation with a statement about how it will affect the performance or similar correspondence that their reliance on the force majeure or “pandemic specific” clauses is made in good faith.
5. Time Penalty clauses
These types of clauses impose a financial penalty on a party should they fail to perform by a contractually agreed deadline. They are found most commonly in construction contracts but other contracts, such as those for a regular supply of materials, can contain similar provisions. It is not difficult to conceive how a lockdown or general movement restrictions could delay performance or make it impossible within the contractually agreed time frames. If time is of the essence in your business and you regularly agree stipulated dates or deadlines for delivery then it would be beneficial to consider and perhaps include provisions dealing with how penalties or deadlines should be dealt with in the event of further Covid-19 restrictions.
When considering your standard contracts it is important to reflect on your businesses experience during the Covid-19 pandemic. In particular consider the following:
· Where did you feel exposed ie your standard terms offered you no protection?
· Where did you feel taken advantage of? Did suppliers or other parties rely on the pandemic restrictions to avoid their obligations in circumstances which you thought were unfair.
· What changes would you like to see in your contractual dealings?
It is at this point that consulting with a specialist legal advisor would be most beneficial. The types of clauses suggested in this article involve complex considerations of law and will be specific to each individual business. Your legal advisor will be best placed to advise you on your specific legal needs given the nature of your business and the unique challenges it will face should lockdowns be imposed or restrictions remain in place.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to a commercial contracts, we at Serenity Law LLP will be able to assist. Please contact us on 0800 019 7773 to arrange a consultation