COVID-19: Coronavirus and English law commercial contracts
Assess the impact of the Coronavirus on your key commercial contracts. We provide a checklist for Danish companies considering how to deal with the risk of contractual breach arising as a result of COVID-19 under English law contracts.
In a recent update, we analysed whether COVID-19 may be considered a force majeure under Danish legal and contractual principles.
Below we provide a checklist for Danish companies considering how to deal with the risk of contractual breach arising as a result of COVID-19 under English law contracts.
As a result of the coronavirus pandemic, Danish companies are facing substantial uncertainty and weakened economic prospects. As governments worldwide implement measures to combat the spread of the virus, travel restrictions, business closures and falling demand for goods and services are impacting companies across Europe and the globe raising concerns that contracting parties may start breaching obligations.
Where the relevant contracts are governed by English law, there are a number of potential contractual clauses and legal principles that our clients should be aware of.
Are you at risk of being the breaching party?
If you are concerned that current conditions may lead you to breach your contractual obligations, we suggest you take the following steps:
- Review your key commercial contracts in detail: It is important to check the governing law and jurisdiction of your key commercial contracts. There are significant differences between common law and civil law legal systems and the interpretation of contractual clauses. Under English law, the focus of the English courts when interpreting contracts is the intention of the parties to the contract and the terms of the contract are fundamental in determining this. Understanding the terms of the contract will inform: (i) how you enter negotiations or discussions with your counterparty - i.e. which clauses may be breached, what are your termination options, are there other clauses you can rely on; (ii) whether you can apply other provisions in the event of breaching obligations (e.g. force majeure); and (iii) whether your liability is limited.
- Ensure any contract amendments are provided in writing: If, following discussions with your counterparty, you reach agreement that your performance of the contract can be delayed, you should ensure the agreement is properly documented or there is a risk it will be unenforceable. English law contracts may include boilerplate clauses specifically excluding oral variations and may even set out specific procedures for amendment (i.e. a formal amendment document may be required as opposed to a simple email confirmation).
- Identify any force majeure clauses and assess their applicability: Force majeure provisions are purely contractual under English law and therefore determining whether the clause applies is a matter of contractual interpretation. The onus will be on you as the party wishing to exercise the clause to prove that a force majeure event has occurred and that this event has affected your ability to perform your obligations. We suggest you check whether pandemics are specifically referred to in the relevant contract and assess whether COVID-19 has specifically caused the relevant breach and what the contractual remedy is (i.e. delay, termination etc.). The force majeure clause may also be drafted generally and include a non-specific catch-all clause that could be exercised however litigation risk increases and case law provides limited comfort regarding general force majeure clause interpretation.
Note: Check the drafting of your force majeure clause - is the requirement that the force majeure event "prevents", "hinders" or "delays" your performance? A force majeure event that "prevents" your performance will be a higher threshold to satisfy than an event that "hinders" or "delays" your performance e.g. events that impact the profitability or ease of you performing contractual obligations are unlikely to be regarded as force majeure events that "prevent" performance of your obligations.
- Can you rely on the English law doctrine of "frustration": The English law doctrine of frustration allows a contract to be discharged when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. If a frustrating event occurs, the parties are no longer bound to perform their obligations. As you may note from the above, however, the threshold is high.
Is your contractual counterparty at risk of being a breaching party?
If you are concerned your counterparty is at risk of breaching the terms of your contract, your focus should be on ensuring that you preserve your rights during any negotiations with your counterparty. We suggest you take the following steps:
- Ensure that there is no implied waiver of rights: If you enter into negotiations with your counterparty to amend the contract, ensure that you re-assert your contractual rights as part of such negotiations. It is important that you do not "accept by conduct" (i.e. not take any action) any breach of a contractual obligation as there is a risk that inaction may be interpreted as a deliberate choice by the non-breaching party to waive the performance of the contractual obligation in question.
- Mitigate your losses: The rule of mitigation under English law requires a non-breaching party to take steps to mitigate its losses and to avoid taking unreasonable steps that increase its losses. In spite of a breach of contract by your counterparty, it is important to ensure you take reasonable steps to ensure any losses sustained by the breach are limited. Any losses that you have sustained and are claiming from the breaching party will be reduced if you have not taken reasonable steps to mitigate these losses.
- Assess your legal grounds for termination: Consider your contractual and common law termination rights carefully. To the extent you have strong grounds to terminate, act quickly and ensure the relevant procedural requirements for termination are complied with. Positive action is required to terminate a contract. A termination notice served without adequate grounds and that fails to comply with the contract may be ineffective, exposing you to litigation risk and damages claims from the counterparty.
Finally, from a practical perspective, we suggest that you may want to consult with your insurers, ensure that all material correspondence with your counterparty is put into writing, assess whether alternative suppliers may be appropriate (any increased costs of dealing with such suppliers may be claimable from a breaching counterpart) and - as always - discuss your legal position with you legal advisors in order to assess the strength of your position and your best way forward strategically.
COVID-19 task force
We have set up a special task force to regularly post information about the various legal issues that you and your business will or may be facing as the COVID-19 situation progresses.
In Danish: Kromann Reumert COVID-19 task force
In English: Kromann Reumert COVID-19 task force