The coronavirus outbreak is impacting the ability of many businesses to meet their contractual obligations. If you are concerned that you might breach a contract, it is crucial that you first review that contract to mitigate your losses. This article outlines seven ways you can protect your business from the consequences of breaching a contract due to the coronavirus (COVID-19).
1. Assess Your Risk Exposure
Take stock of all of your contracts that COVID-19 may affect, and assess the consequences if you breach those contracts. Understanding your risk exposure is critical to developing an effective mitigation strategy. The consequences of your breach may differ from contract to contract.
For example, they could range from receiving a reduced fee, to having the contract terminated and having to pay compensation to the other side.
If you have limited resources to spend on mitigation, you should focus on contracts which you have the highest likelihood of breaching and expose you to the greatest level of risk.
2. Review Your Existing Customer Contracts
You need to consider whether you have any contractual rights or remedies under the contract. Ideally, you will have the following key protections under each of your customer contracts:
Extensions of Time and Delay Costs
If your contract is time critical, then delayed performance may constitute a breach. This could expose you to a claim for compensation from the other party. You need to consider whether the contract contains a clause allowing you to request an extension of time when your performance is delayed by circumstances outside of your control.
You need also to make sure you note any potential barriers to claim.
For example, do you need to give notice to the other party within a certain timeframe? Strict compliance with these provisions will be imperative to securing relief in the event of a delay.
If your contract has performance metrics, you should consider whether there are contractual implications for your failure to meet them. Ideally, your contract will have an abatement regime that will provide you with relief if circumstances outside of your control caused your failure to perform a contract.
You should consider whether your customer contracts include a force majeure clause. Generally, force majeure clauses will suspend your obligations under a contract if events or circumstances beyond your control impact them.
It will be important for you to check what is included in the contract's definition of 'force majeure', and whether the definition might include a pandemic. Force majeure clauses will often only offer protection where the event was unforeseeable.
3. Update Your Customer Contracts
If you are entering into new contracts, you should ensure that your contracts include the protections set out above, to the extent they are relevant to your business.
You should also consider inserting provisions that appropriately limit or exclude your legal responsibility under the contract.
This includes provisions that cap your legal responsibility to a monetary amount, and exclude you from responsibility for consequential losses.
4. Can You Frustrate the Contract?
Frustration can occur when a party to a contract is unable to do what they agreed to do because the circumstances they are operating in are radically different from when they entered into the contract.
You can only rely on frustration to get out of a contract when you could not have foreseen the circumstances, and you are not at fault. In other words, you need to prove that the contract cannot apply in these circumstances, which is different from saying that you cannot perform because it is now more difficult or too expensive.
If you can prove frustration, the contract will end. Generally, while future obligations under the contract will be waived, all obligations before the point of frustration are still enforceable.
5. Check Dispute Resolution Clauses
It is always important to understand the process of dealing with a dispute under the contract. This may differ depending on the type of dispute.
You need to consider whether there is a clause requiring that the parties take certain steps. You also need to check if there is anything you must do to start the dispute resolution process.
6. Try to Negotiate a Commercial Solution
You need to consider whether it is possible to negotiate a commercial solution with your customers. Depending on your commercial relationship, being open and upfront with your customer and finding practical solutions could be your most effective strategy.
In your communications with your customer, you must not inadvertently alert the customer that you can no longer fulfil the contract. This could result in them immediately terminating the contract.
7. Mitigate Your Losses
You should take all steps necessary to mitigate your losses, and those of your customers, arising from COVID-19. Keep detailed records of how you are being affected by COVID-19, and what steps you are taking to mitigate your losses. These records may become useful in the unfortunate event of a dispute.
COVID-19 is having a huge impact on the ability of businesses to meet their contractual obligations. If you are concerned that you might be forced to breach a contract, it is crucial that you first review that contract to check if there are any ways to mitigate your losses.
Originally published 14 August, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.