What now? Dealing with contractual performance issues in the second lockdown

Introduction

Greetings to all following another week absorbing the implications of what a second lockdown might look like and how it will affect us all.

This weeks commercial update will in the light of this, take another look at force majeure events and finally note the parliamentary reaction to the rise and fall of algorithms following the exams controversy earlier in the year…

Force Majeure

The starting point is understanding what we mean by this term. Effectively this is where unforeseeable circumstances that prevent someone from fulfilling a contract. It feels like the  second lockdown on the back of a second COVID wave could have a real impact for businesses, many of whom may have been affected by a force majeure event related to the first wave of the Covid-19 pandemic.

In some cases, businesses may be back to full contractual performance as the initial restrictions were lifted but may then find that the re-imposition of restrictions affects their contractual performance in a different manner and to a different extent. Other businesses may find that they need to assess whether they need to give notice of a new force majeure event or will be seeking force majeure relief for the first time.

The issues to consider when assessing whether force majeure will apply are:

  • The occurrence of an event beyond the parties’ reasonable control that falls within the term “force majeure” in the contract. This may be defined by reference to a list of categories of events, which may include an epidemic or pandemic, a change of law or regulation, or an act of government.
  • Whether this event has affected the party’s ability to perform the contract. The relevant test is usually set out in the contract, but may require that the force majeure event has prevented, or perhaps hindered or delayed, performance of obligations under the contract.
  • Whether the party could have avoided the impact of the event itself or its consequences by taking reasonable steps and has satisfied any notification requirements in the contract.
  • NB: there may also be further obligations on parties to take further steps (sometimes called “best endeavours” or “reasonable endeavours” obligations) to mitigate the impact of the force majeure even. These could include things such as putting into effect business continuity plans, adjusting the supply chain or resequencing work.

Practical Steps

For businesses looking at this, the practical issues to consider would be:

  • Whether those restrictions prevent the business performing its contractual obligations and whether the restrictions or the cause falls within the scope of the force majeure clause in the contract.
  • What terms there are to terminate for long-term force majeure;
  • Whether other provisions might apply, such as change of law;
  • Whether the business has taken reasonable steps to avoid, or mitigate, the impact of the renewed restrictions on their contractual performance. For example:
    • The availability of materials and other resources necessary for performance of the contract during the period following the relaxation of initial restrictions and the ability to stockpile such materials before the re-imposition of restrictions.
    • For supply contracts, the extent to which a party could have identified and changed to a source of supply likely to be less vulnerable to a second wave.
    • The possibility of rescheduling outages and maintenance activities to undertake operation-critical maintenance before the second wave hit.
    • The ability to change operating practices, train more staff, adjust working conditions to facilitate social distancing, etc.
    • What steps to the resilience of operations and implement work-arounds to deal with the new restrictions and any increased restrictions that may be imposed;
    • It may also be worth taking a collaborative approach to the second wave of restrictions and having discussions around alternative ways of performing the contract and what mitigation can be put in place – while considering carefully before waiving any contractual rights;
    • Any contract entered into now should deal expressly with the possibility of Covid-19 related restrictions having an impact on performance, rather than relying on a general force majeure clause for protection.

What next for Algorithms

With the results of the exams algorithm controversy starting to fade into the recent past, it is interesting to see recent proposals for an “Accountability for Algorithms Act” by the Institute for the Future of Work (IFW).

The proposals aim for “an overarching, principles-driven approach to put people at the heart of developing and taking responsibility for artificial intelligence, ensuring it is designed and used in the public interest.”

The proposed Act, detailed in Part 5 of the IFW’s “Mind the Gap” report, would help guide and align the existing regulatory ecosystem, the current law, and decisions taken by the makers of algorithms.

A number of proposed statutory duties are given top billing:

  1. A duty on developing and/or deploying algorithms to undertake an algorithmic impact assessment, including a dedicated equality impact assessment;
  2. A duty on developing and/or deploying algorithmic systems to make adjustments which are reasonable in the circumstances of the case, with regard to the results of the equality impact assessment;
  3. A duty across the design cycle and supply chain to co-operate in order to give effect to these duties; and
  4. A duty to have regard to the desirability of reducing inequalities of income resulting from socio-economic and also place based disadvantage.

In terms of regulatory supervision, the IFW is proposing to sit between the Equality and Human Rights Commission and the Information Commissioner. The IFW is clear that the proposals “need very wide consultation” – i.e. we are at a very early stage – how much governmental and legislative bandwidth the proposals will get, given the competing pressures of COVID-19 and Brexit planning, is clearly another matter.

Conclusion

In depth contract analysis and audit should still be a priority for businesses, even with the latest announcements. Looking to deal with any possible contractual issues early will allow more options and possible outcomes, so the best advice would be to horizon scam and take advice early. Many businesses have already started an audit of their contracts as part of their initial response to Covid-19 – if not, it may not be too late to do it. This should consider each contract individually, the trigger events, the extent of the impact required before relief can be claimed, any notification requirements and specific provisions around mitigation, termination rights and the ending of force majeure relief.

However it may feel at the moment, parties who are entitled to terminate the contract for prolonged force majeure should remember that the second wave restrictions are for a limited period. Such termination rights are commonly tied to the length of time that a party is prevented, hindered or delayed in performing its obligations under the contract, so the focus could and should be on the time when the affected party is no longer affected by the Covid-19 pandemic.

Please drop us an e mail or call if you need any further details and stay safe and well.

Roger