07 May 2020
The new normal: Contracts and Covid-19
Never has the significance of a carefully worded contract been more apparent than during the Covid-19 pandemic. Matthew Brandis, partner and head of B P Collins’ dispute resolution practice, examines what a judge will consider, if a breach of contract dispute ends up in court.
The Covid-19 issue still hangs over many individuals and companies who are concerned about whether they will be in a position to fulfil their contractual obligations. Despite a gradual ease in lockdown rules, there will be some companies, such as those in the hospitality sector, who will not be able to operate fully for some time. This is particularly difficult, when they’re already feeling the squeeze on cash flow during the lockdown.
This squeeze could be pushing them to review any non-essential expenditure and look to renegotiate existing supply contracts. Any well-drafted commercial contract between buyer and supplier should set out (amongst others): price; payment terms; mechanism for variations of the contract; force majeure; governing law and exclusive jurisdiction. All of these will play a factor in determining the legal position of a buyer looking to agree discounts with a supplier.
A buyer might use its bargaining power to present suppliers with an ultimatum: either the supplier agrees to discount the price or the buyer may try to rely on force majeure or frustration by claiming that the Covid-19 pandemic makes it impossible for the buyer to perform its obligations under the contract.
If the supplier agrees to the discount, then that agreement will vary the previous agreement and avoid any breach of contract by the buyer for paying a lesser sum than was originally agreed. If the parties cannot reach agreement, and the buyer does not pay the correct amount, then it all comes down to the contract itself, and whether “commercially” the seller wishes to make a fuss. The buyer would need to satisfy a court that it has been virtually impossible for the agreement to continue as a direct result of this pandemic. That all depends on the specific circumstances and whether a particular judge on a particular day would think the buyer is justified in not paying.
Of course, of particular importance with international transactions is that the contract would need to be checked to ensure it is being interpreted under the correct ‘governing law’ (i.e. English law or otherwise) and whether the contract has chosen an exclusive jurisdiction to resolve any disputes (i.e. the courts of England and Wales or otherwise).
The devil is in the detail. There may be several other factors at play including the other aspects of the contract, the circumstances surrounding non-payment, the extent to which ‘Government guidance’ was followed and whether either party has any other options open to them. The pandemic is so new that at a best guess it’ll take at least 12 months for disputes between parties to trickle through the judicial system for us to receive any guidance from the Court. It’s not always clear cut and we would recommend you seek independent legal advice if you find yourself in this situation.