Businesses should immediately dust off all active signed commercial contracts to check whether they can be excused from their contractual obligations due to COVID-19 or whether the other parties to the agreement are contractually entitled to be excused for not performing their obligations. This aims to manage finances, resources and risk at a time when there is more uncertainty than certainty.
Businesses need to carefully consider the wording of any Force Majeure clauses to check if the clauses expressly excuse a party’s failure to perform under the contract as a result of a pandemic, natural disaster or an act of terrorism etc. If you are in the process of agreeing terms, you should consider the inclusion of such a clause to cover any similar future events.
Force Majeure: Even if the commercial contract contains a Force Majeure clause, the specific wording of the clause will need to be carefully considered to ensure that the meaning of the clause was precisely what the parties to the contract intended it to cover at the time of signing up.
Break Clauses: Contacts (whether for the supply of goods or service, or for a commercial lease) may also have break clauses, or an expressed right to termination which should be urgently considered or else the right to terminate could be lost.
Frustration: If commercial contracts do not contain an expressed Force Majeure clause and there are no expressed provisions entitling any party to lawfully terminate the agreement earlier than the intended duration, either party may be entitled to argue that serious events have occurred after the formation of the contract which has been both unexpected (so not a Force Majeure event) and it has been beyond the control of all the parties to the contract - rendering the commercial contract commercially impossible to adhere to. This is known as the contract having been ‘frustrated’ and also covers situations where one of the party’s obligations are now radically different to the obligations at the entrance of the contractual relationship. Arguing this point requires careful analysis of the facts of the situation and commercial arrangement.
Own your rights: Businesses that are working with consultants or parties that are self employed should check what the legal position is in relation to in relation to who owns any created intellectual property (copyright, patent rights, know-how or confidentiality) and on what basis are any intellectual property rights transferred to the business (on payment of fees, or some other trigger). If the contract is silent, the legal position is likely to favour the consultant, self employed or the commissioned party and any intellectual property rights will need to be transferred over by way of a legal assignment of rights. If you do not have one and are unsure, you should get this checked by our specialist intellectual property lawyers, who can advise you whether you need an assignment or not.
Breach of Contract: If commercial contracts are not terminated lawfully and contractual obligation not fulfilled pursuant to the terms of the agreement, the defaulting party may be faced with the threat of legal proceedings for being in breach of contracts. The party entitled to have received the benefit under the contract, but now lost due to the breach of contract, is entitled to sue for damages, which aims to seek a monetary reward putting the compliant party in a position had the contract been lawfully fulfilled.
Debt Recovery: It is expected that companies will also serve Statutory Demands on parties that have not paid under a contract. If you receive a Statutory Demand or intend to issue one, the details of the contractual relationship should be carefully considered, otherwise the demand could be opposed.
Product Liability: Businesses may have sold or received goods or services making claims that were either fraudulent or a misrepresentation which has led to financial losses being suffered. Please contact one of our specialist solicitors to start assessing your risk profile or claim potential.
- Locate all active commercial contracts that contain an obligation on your business or that your business receives.
- Check contract clauses for Force Majeure provision.
- Check Termination clauses for rights to terminate
- Analyse whether either parties’ obligations are different.
- Consider your businesses’ risk profile and intellectual property rights.
- Take appropriate action - this might include writing to parties that are under an obligation to adhere to the contract to remind them that they have contractual obligations; or if your business is under the obligation, you may want to give formal notice to terminate or other legal rights.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.