We’ve had a number of enquiries about how to approach any review of business terms of trading in the light of the return to work and what follows are our thoughts on some areas for commercial contract review on this basis.
Before I start the overview, the other big item coming down the track of course is Brexit. Generally, as you may know, English contract law consists of legal principles developed and maintained by English courts and Parliament and broadly, these are unaffected by Brexit. However, Brexit could have significant implications for commercial contracts, which in turn will affect the contract’s risk profile. I’ve looked at this with specific reference to overseas supply in an earlier update but will be returning to the subject in the future updates.
The first point to make is that COVID-19 has been the trigger for many businesses to review their contracts to cover all of:
- Mitigating the risk of loss in changing economic or trading conditions.
- Avoid being adversely affected by another party’s financial difficulties.
- Getting the maximum value from a contract in an unfavourable commercial climate.
In many ways, this will not be dissimilar to some of the Brexit considerations and the following supplier areas with this in mind are as set out below together with the actions recommended for suppliers:
- Credit limits – make sure that you review credit limits with existing customers, reconsider credit limits and update credit searches to ensure that the level of credit is appropriate to the financial standing of the customer. If there are concerns as to the customer’s creditworthiness, do expressly require the customer to provide regular information as to its financial status. Such an obligation could be incorporated into a ‘governance’ clause in your terms of trading.
- Retention of title – where appropriate, you should either include/update any retention of title clause. Also, make sure that the supplier can exercise its right to stop the customer selling or using the goods/services, and to repossess the goods, before the customer enters insolvency proceedings.
- Guarantees – consider asking for a guarantee from any directors (if the client is a limited company), or the parent company if there is concern over any new customer’s credit rating. If the customer becomes insolvent, consider looking to seek recovery from guarantors plus appropriate checks on proposed guarantors, to avoid the guarantees turning out to be worthless.
- Invoicing and payment terms – consider reviewing the timelines for invoicing and payment terms for all customers. Look at your invoicing and collection procedure to monitor and, if necessary, enforce payment terms. Payment will depend on the provisions of the contract and this will be of particular concern where payment obligations are suspended during the period of force majeure as discussed below.
- Terminating or suspending – check your rights to terminate or suspend a contract, if the customer fails to pay on time or should another event occur that might affect the operation of the contract, such as withdrawal of a licence. A supplier of goods or services cannot usually terminate or suspend a contract for the supply of goods or services once its customer has entered insolvency proceedings, although there are exceptions. Assuming an exception does not apply, do ensure that any contractual right to terminate or suspend performance is exercised before the customer enters insolvency proceedings. Termination clauses typically deal with some or all of the following:
- automatic termination or expiry at the end of a fixed term;
- allowing either party to terminate the contract at any time (e.g. on 30 days’ notice);
- termination for material breach; and
- termination in the event of insolvency or change of control of one of the parties.
A ‘hardship’ clause can be useful where an agreement has become more difficult, but the parties wish to work through their commercial options before terminating as a last resort. This obliges the parties to renegotiate the agreement in the event of hardship resulting from an event that occurred after entering into the agreement which has made the contract materially less beneficial or more onerous.
A dispute resolution review may also be sensible to see if any drafting exists or needs amending that would describe how disputes arising in relation to an agreement will be handled and offer a mechanism to attempt to resolve disputes quickly and cost effectively without the need to issue proceedings in the courts or go to arbitration.
- Business interruption – check to ensure that there are sufficient rights in the terms to protect the organisation in the event of an unforeseen crisis.
- Frustration and Force Majeure – under English law, contractual obligations are absolute and the contracting parties are bound to fulfil them, a party that is unwilling or unable to perform its contractual obligations resulting from a business interruption event will be in breach of contract, which would entitle the other party to terminate the contract and/or claim damages. Under common law, the only way to avoid termination of the contract or the payment of damages in these circumstances is for the non-performing party to demonstrate that a “frustrating event” had occurred and, therefore, that the common law principle of frustration applied.
This is supplemented by the Law Reform (Frustrated Contracts) Act 1943 (LRFCA 1943), which sets out most of the legal consequences for frustration. The LRFCA 1943 applies to English law commercial contracts (except insurance and shipping contracts or contracts dealing with perishable goods) and unless the parties have decided to exclude it.
Any existing force majeure provision should be reviewed to check it enables the parties to decide how they want to deal with a business interruption issue before it arises and to see it has provision for any/all of:
- an extension of time for contractual performance;
- exactly what types of events they want to be caught by a force majeure clause, specifying the trigger events;
- a suspension or variation of the contract;
- provision for termination of the contract if the event continues beyond a certain time;
- Should the clause include a right to terminate if the force majeure event continues beyond a specified period;
- Should this right be available to both parties or just to one party; or
- making sure that a force majeure event that prevents one party from performing the contract does lead to a cost for the other party. As an example, if a supplier has mobilised its personnel so they are at the customer’s premises but the customer is unable to perform its obligations due to force majeure, the supplier will have incurred the employment, travel and subsistence costs of its personnel being on site. Under a standard force majeure clause, the supplier may be then unable to recover these costs.
Even a strong force majeure clause is unlikely to give watertight protection covering all eventualities and should be considered as just one of several clauses to cover potential outcomes of a disastrous or unforeseeable event.
- Variation – any variation clause, (sometimes known as a no oral variations, or a no oral modifications clause), which seeks to restrict variation of the agreement to those variations agreed in writing by the parties should be checked. The aim is to exclude the possibility of informal, and perhaps inadvertent, oral variations being made to an agreement to prevent attempts, including abusive attempts, to undermine written agreements by informal means and avoid disputes about whether a variation was intended and about its exact terms.
- Waiver –check that the ‘no waiver’ clause so that it states that no delay, neglect or forbearance on the part of any party in enforcing (in whole or in part) any provision of an agreement is deemed to be a waiver of any other provision or will in any way prejudice the right of that party under it. This would usually benefit the supplier but the commercial risk of this would need checking.
- Time of the essence provisions – it is important to be aware, if this phrase is used in the terms of trading, what it means. Its effect is then drastic and sometimes unexpected. If time is of the essence for a matter or process, even a short delay may lead to loss of a right or trigger a common law right to terminate for breach.
- Notice and e -signature provisions – do check the notice provisions in the terms of trading to make sure they can operate in either a local or national lock down situation and have flexibility where for example premises may be shut. It may also be worth reviewing any e-signature provisions based on the current position that an electronic signature is anything in electronic form, which is incorporated into or logically associated with an electronic communication and which purports to be used by the individual creating it to sign. It can therefore take a wide variety of forms, from a secure digital signature, using dual key encryption and a certification authority, to less formal signatures such as a scanned manuscript signature, clicking an icon on a website to confirm an order, and typing a signatory’s name (or initials) into an electronic document, such as an email.
Please bear in mind that the restrictions when dealing with consumers need to be borne in mind to ensure that any re-draft or exiting provision is not then unenforceable when dealing with a consumer. However, the above headings we hope give an overview of the main areas to start with and on the questions asked. Please bear in mind that how the drafting of the clauses for each of these would work or need changing would need to take into account both the relevant risk assessment from the supplier for COVID-19 and the commercial risk profile of both the supplier and the terms of trading in question – now more than ever, there is no ‘one size fits all’ approach here.
Please drop me an e mail or call if you need any further details and stay safe and well.