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Covid-19: Are your terms and conditions ready for trade post-lockdown?

Insights / 22-05-2020

As social distancing measures are slowly being eased across the globe, many businesses will be revisiting their own (and their supplier) T&Cs as they look to resume trade.

While many parties to commercial arrangements sought to suspend/terminate their obligations under existing agreements (e.g. by claiming Force Majeure), as businesses begin to re-open, they will need to consider how their T&Cs have already responded to the crisis and what changes might be needed to provide greater flexibility (both for themselves and their customers/suppliers).  

By taking the time to appropriately allocate risk and expectations at the outset, parties to commercial contracts will be able to have more control over how their potential exposure is managed.  We set out below some of the key queries being considered for COVID-19 related risk allocation in business-to-business commercial terms and conditions.

Can I make my contract conditional on the COVID-19 Restrictions Being Lifted? 

Yes. You could do this by including appropriate conditions precedent in the contract.  A condition precedent is a clause in a contract that provides that performance of the contract, or certain obligations under it, will only come into force if and when specified conditions are met.  An example condition precedent in relation to COVID-19 could be the lifting of a particular regulation restricting mass gatherings. However, the parties to the contract will need to ensure that the trigger is clearly drafted and that the contract deals with the scenario where the condition is not fulfilled within a certain time period. The parties should also specify whether a future change (e.g. if restrictions are put back in place) will give either party a right to terminate, otherwise the contract (or the obligations subject to the conditions precedent) will continue to run.  In the case of existing contracts, you may wish to try and negotiate specific terms to address the COVID-19 impact and amend the contract terms to reflect this.

Our contract stipulates that the time for performance (including payment or delivery) is of the essence. How can we address this in respect of the current climate? 

Where time for performance is of the essence, the most trivial breach could allow the innocent party the right to terminate. It is important therefore to address this carefully in both new contracts and existing arrangements.  While customers will want a degree of certainty on delivery timelines, the parties could instead agree a timetable of estimated delivery dates or include a pre-agreed window of flexibility (e.g. delivery within “x” days of any date provided). Whilst such grace periods and relaxation of the performance deliverables may be tied to COVID-19, they may also apply to Brexit trigger events which are likely to impact the supply chain.  To avoid having to revisit contracts again, it would be advantageous for the parties to consider including provisions now for risk allocation in both these scenarios.

The customer is refusing to pay for supplies until delivery has occurred. Are there any options we might discuss with the customer?  

Some customers may be reluctant to part with funds before delivery whereas suppliers will now, more than ever, want to ensure they do get paid. Potential compromises might include: (i) upfront deposits; (ii) use of guarantees; (iii) making payment conditional on clear milestones; or (iv) retention of title clauses (where physical goods are being supplied).

We may need to change our requirements in terms of quantity/volume as things begin to stabilise. How can we address this? 

Both customer and supplier are likely to face challenges with regard to their requirements and capabilities in the current climate.  Consider including a clear procedure for how orders/volume may be varied, by whom and when these changes are permitted. The parties may also agree to allow one another a buffer of x% e.g. the supplier in respect of a shortfall of the goods for each delivery and the customer on minimum purchase order requirements.  In the case of existing contracts, the parties may agree a revised process which can on the agreement of both parties be added to the contract (by way of schedule or additional clause provisions).

What should we consider when looking at our liability cap? 

What heads of losses are to be excluded (e.g. loss of profit, loss of sales and/or indirect consequential losses)?  This will vary contract to contract and the parties may consider specifying the types of losses which aren’t excluded (e.g. costs associated with sourcing an alternative supplier/customer) to ensure that liability is capped at the right level.

Will force majeure apply to COVID-19 in contracts entered into post lockdown?  

Force majeure or its equivalent might not apply to contracts entered into post lockdown because COVID-19 is known to the parties and therefore a foreseeable risk.  Any new contract should specify what elements of COVID-19 associated risks the parties consider to be force majeure (e.g. the re-introduction of stricter lockdown measures). Generic references to COVID-19 should be avoided.

COVID-19 has forced us to consider using third parties to meet certain contractual obligations. How do we address this in our contracts? 

Most contracts prevent one or both parties from sub-contracting their obligations. Both parties may require some flexibility which allows them to sub-contract certain obligations in order to meet estimated deadlines/obligations. The parties should consider, both for existing and new contracts, whether sub-contracting should be permitted and if so the process to be followed e.g. the parties may agree that it is permitted provided prior consent is obtained or provided written notification is given.

Consumers

It is worth noting that where a contract is with consumers, it will be subject to additional protections afforded by the Consumer Rights Act 2015.   

Government Guidance

When considering any changes to T&Cs, regard should also be had to the Guidance on Responsible Contractual Behaviour issued by the UK Government – see our article here.

The above does not constitute legal advice nor does it consider a complete list of issues to consider in the context of COVID-19 and commercial agreements. Should you have any queries or would be interested in us undertaking a health-check on your T&Cs, please do not hesitate to contact the authors of this article.

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COVID-19: Impact on Supply Chain

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