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Importance of Reviewing Commercial Contracts in the times of Coronavirus and Brexit

August 11, 2020

With the UK’s economy opening up, commercial life is starting to enter a ‘new normal’ phase. Coming down the line, we also have Brexit as a fundamental market shift that businesses will need to increasingly consider.

Commercial contracts are the glue that binds business together. Having a written commercial agreement is not just important, it is crucial. The primary purpose of written terms is to provide a clear framework as to how a commercial relationship will work.

Agreements that form a legally binding contract but drafted with vague conditions, may lead to uncertainty and require dispute resolution, even the potential of a costly lawsuit.

A well-constructed commercial contract will seek to balance the risks from the relationship and clarify the duties on each party – drafted to avoid legal uncertainty by including specific clauses that will avoid disputes. There is no harm seeking to minimise your exposure in a commercial agreement, but it is sensible to recognise that in contract law, the other party may be doing the same thing!

Even under ideal circumstances, minor breaches of law can occur, especially if the contract spans many years. Most of these can be remedied with a quick discussion between the parties.

However, an international incident such as the Coronavirus pandemic can result in breaches of contract law that are at times unavoidable. Having your contracts reviewed by a qualified business lawyer is an important step to ensure that your interests are protected.

But to understand the consequences of a breach in a contract, it is first necessary to explain the different types of breach which can occur.

Minor, Material, Fundamental and Anticipatory breach

A minor breach of a commercial contract has little or no impact on the outcome of the agreement. For example, when you order online groceries, the driver will often have a list of substitutes because certain products you requested were not available. Technically, this is a breach of contract, but there is no loss as the alternatives are the same product but a different brand.

A material breach will have a detrimental effect on a project’s outcome and the injured party would not have entered into the agreement if they had known such a breach would occur. The remedy for a material breach is normally damages.

A fundamental breach goes right to the heart of the agreement and presents a clear break in terms of the agreement. The injured party can seek to terminate the contract under the law.

An anticipatory breach refer to situations where one party tells the other they cannot perform all or part of commercial contracts. The non-performing party can be liable for damages.

Can a force majeure clause limit liability for a breach resulting from Covid-19?

The Coronavirus pandemic has been seen to cause a breach of existing contracts in several ways. Supply chains may have been  disrupted and deadlines might have been missed for delivery or payment or fulfilment of services. A force majeure clause can mitigate a party’s liability if they are unable to perform part or all of the contract due to an unforeseen event. However, careful wording has to be included to cover pandemics. So, for breaches to date, a careful examination of the contract would be required to see if the criteria for force majeure had been met. If not specifically covered, it may be the case in future that Covid-19 is no longer be considered a force majeure event in law as it has been with us since the beginning of 2020, so its impact can therefore be anticipated by the contracting parties.

Commercial contract reviews can save time, money and stress

Uncertainty is the enemy of business. A recent study by the Legal Services Board found that 20% of businesses reported ill health impacts for staff from prevailing legal issues. Having your commercial contracts drafted and checked by an experienced solicitor will assure that the legal advice provides clairty around your obligations and liabilities within contract law. This can apply to your obligations under an existing contract (have you committed a breach, what kind of breach is it, what are your remedies or does force majeure apply). It can also apply to contracts which are being drafted for the future, so as to minimise risks from breach and disruptive events like COVID-19.

Whether with your suppliers, customers, partners or shareholders, there are huge range of commercial contracts. We have pulled together a list of those that businesses frequently request guidance from an expert legal team on a commercial contract dispute.

  • Supply and purchase of goods and services
  • Export and import of goods and services
  • Agency and distribution agreement
  • Commercial property lease
  • Limited liability partnership
  • Confidentiality agreement
  • Software and IT contracts
  • Contractor and outsourcing contracts
  • Licenses and development agreement
  • Website terms and conditions
  • Privacy and data protection
  • Copyright and other intellectual property rights (IPR)
  • Franchise agreements
  • Joint venture
  • Shareholder and investment agreements

Legal issues in contracts post COVID

Contract reviews will be important to help parties optimise their risk / reward structure in contracts. You may either want to be in a position to minimise performance or legitimately get out of the contract and the resultant liability for breach in the future, or you may want to be in a position where you can enforce the contract against someone else who is trying to avoid it.

If you are seeking ways to minimise liability in case you are not comfortable with performing against the contract, then ways in which this can be achieved include:

  • Having a clear force majeure clause covering COVID
  • Having a cap on liability for you if you are in breach
  • Minimising your warranties to the other side;
  • Making sure there is no indemnity (or a diluted indemnity from you if you are in breach
  • Excluding performance guarantees from you, e.g. sales targets
  • Back-ending any payments due from you, so that if something goes wrong you have not deployed all the cash required by the contract
  • Making sure choice of law and jurisdiction clauses suit you (so that if there is a dispute it is brought in a country where the legal system suits you)

On the other side of the equation, if you are seeking to maximise performance by the other party in the future, in case they want to avoid the contract, then ways of doing this can  include:

  • Cutting down or not including force majeure clauses which make it easy to avoid performance
  • Having clear remedies for breach – even a minor one
  • Maximising warranties from the other side
  • Including a wide ranging indemnity for the other side
  • Having no or high caps on liability for the other side
  • Keeping title to any goods you are supplying till they are paid for (so that if the other side is in payment breach you can assert ownership of the goods)
  • Front-endingany payments from the other side
  • Including performance guarantees for the other side, e.g. sales targets
  • Making sure choice of law and jurisdiction clauses suit you

How will Brexit impact commercial contracts?

We will be producing more detailed blogs on the impact of Brexit, but today we will cover off initial guidance around commercial contracts.

Many commercial agreements would seem to be neutral with respect to the UK being an EU member state. But there are points to consider as we near the end of the transition period.

  • Increased trade barriers: taxation / quotas
  • Regulatory divergence / parallel regimes
  • Changes to the territory covered / competition law
  • Movement of people
  • Currency fluctuation
  • Change in legal jurisdiction

It would be sensible to audit your existing contracts with European entities via a contract review to assess the impact of the UK’s exit with these issues in mind. You should apply the same rigour when negotiating a new commercial agreement.

For example, the exit from the EU does pose questions as to whether there are grounds to terminate existing contracts or their enforcement. This is a question especially relevant to a commercial agreement and contractual obligation that references the EU in its territorial scope.

When considering contractual provisions that deal with the EU as a territory, you need to confirm whether the relevant clause definition covers the member states ‘from time to time’, or specifically names each country. If it is referencing ‘from time to time’ this will not include the UK, but if there is a full list of countries and the UK is named, then the UK may still be covered by the contract.

You may also want to review force majeure definitions in your contract and consider whether the end of the transition period or the UK leaving the EU fits within the definition. In particular, is there is a clause referring to ‘material adverse change’, or any similar wording which allows the renegotiation of terms should the contract become subject to a change in the law or unprofitable.

Also worthy of attention is whether the possibility exists for either party to argue that following the UK’s withdrawal or the end of the transition period, that ‘frustration’ will actually apply, excusing future performance. It is a high bar for a contract to be deemed frustrated and this is only likely to apply to an agreement that creates obligations which have become impossible to observe, with neither party being responsible for the change.

It should be noted that a contract cannot usually be deemed to be frustrated if the alleged frustrating event should have been foreseen by the parties. Incurring additional costs or general inconvenience would not likely qualify. If a contract relies upon inherent EU rules, there may a stronger case for frustration once the transition phase has passed.

The withdrawal agreement states that the UK will continue to apply the EU’s General Data Protection Regulation (EU-GDPR). But as the UK will not be continuing as an EU member state, companies will be required to update commercial contracts wording and privacy notices. Are you sure you know what changes may need to be made and why?

In summary, contract reviews can help identify or avoid post-transition Brexit issues in both existing and future agreements. Covid-19 has added another layer of potential complication.

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