Understanding your contractual obligations amid coronavirus disruption

Businesses across the UK have been plunged into turmoil by the coronavirus outbreak, with company owners facing uncertainty over cash flow, staffing, supply chains and contractual obligations.

Jonathan Askin, Partner in the corporate and commercial team in the London office at JMW Solicitors, spoke to Business Leader to offer some insight during this period of unprecedented upheaval.

‘Take a deep breath and review’

We have been approached by many businesses to assess the risk that Covid-19 poses to their supply chains and ability to meet their contractual obligations. 

Covid-19 is particularly likely to impact on the provision of services (whether B2B or B2C), the movement of goods and labour and businesses must take action now to see how they can take control of the potential risks.

Many businesses are concerned that through no-one’s fault, they or another party may struggle to meet contractual commitments. Businesses must take a deep breath and review:

  • what it will do if there is a lack of supply to them or if they can no longer supply;
  • how it will deal with claims for relief from suppliers;
  • what action can be taken for it to continue to supply or seek relief itself from its contractual obligations.

Every contract will be different and it will also depend on the particular governing law, but there are some steps all businesses can take to manage and mitigate the potential risk. 

Contract terms and insurance

A business should start by reviewing the contracts that are in place and understanding those other contracts in the supply chain. Businesses should then start to understand the potential risks under each contract.

For example, if the business delivers goods late, are the penalties harsh under the contract? If the business receives goods late what action can be taken? What happens if service requirements can’t be met (such as an IT contractor being available in a client’s office)? Which contracts contain force majeure or other relief provisions that may be helpful? What are the termination provisions under the contracts?

It isn’t always obvious how contracts need to be dealt with (even if certain clauses such as force majeure or relief provisions are included and applicable). A business must take a commercial and pragmatic approach – for example, there may be a contract which may prove difficult during this bizarre period of time but that will come good once everything has returned to normal. Each contract and supply chain must be reviewed and looked at in its entirety (legal and commercials) before a decision is taken on how to proceed.

Businesses should also look at insurance policies to understand what is and isn’t covered, as this will also have an impact on the decisions a business will take.

What are the potential options open to businesses?

Depending on the reviews of contracts and supply chains carried out, potential options that may be open to businesses are:

  • taking action where there are force majeure or relief provisions – the particular action will depend on what is in the contract, but it’s likely notices will need to be served;
  • audit trail – ensure records are kept of the evidence as to why force majeure or relief provisions kicked-in;
  • look to other suppliers/customers – have an alternative available to assist you and the supply chain if needed;
  • negotiate – if you will struggle to meet commitments or KPIs – speak to the client/customer and try to find a way forward;
  • terminate contracts – this would need careful consideration, but may be an option where a contract will no longer be commercially viable and negotiations are not on the table;
  • recover assets – if a supplier uses your tools, equipment or is holding goods/other assets – ensure you recover them if needed.

This article is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.