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The impact on commercial contracts

Lawful termination

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. 

Our article Coronavirus and UK construction contracts: where does the risk lie? will provide further insights.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice

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