The scale of disruption to contractual relationships caused by Covid-19 stands to be significant and widespread. In order to assist businesses analyse their position under English law contracts, we have produced a road map outlining the key issues.
Our briefing note, in full, is available here. However, in summary, the core issues we highlight for consideration are set out below. In respect of each, our briefing discusses the legal principles in play and deploys them in the context of worked, practical, examples.
Overall, when assessing any particular contractual arrangement, a holistic view of the situation will need to be taken. Analytical steps will include the below.
Step 1: Review the relevant contract and consider the factual circumstances
Each contract and set of factual circumstances may engage different aspects of the steps set out below, so it is important to consider the specific terms of the contract and the circumstances as a whole.
Step 2: Consider which obligations are potentially affected/disrupted. Is there a potential breach?
Step 3: What are the potential consequences of the breach?
Matters relating to potential consequences of breach may include the following:
- Are there any express rights to terminate the contract (or seek other remedies)?
- Beyond that, the consequences will vary depending on the nature of the breach. The terms should be considered to assess whether they are conditions, warranties or innominate terms (all of which will have different effects on the remedies that may be sought).
- What is the effect of clauses regarding time? Do they expressly state that ‘time is of the essence’? If not, what is the effect of a notice following a missed deadline specifying a time for performance?
- What damages may be sought? For example, if an innocent party elects to terminate a contract following breach, it is entitled to claim for loss of bargain damages. If an express right to termination is used, this will affect the damages that may be claimed.
Step 4: What defences may there be for the party potentially in breach?
- Even if there is potentially a breach of contract, there may be ways in which the non-performing party can excuse itself. These will be both contract and fact dependent, but examples may include:
- force majeure clause/frustration;
- claimant failed to mitigate loss;
- exclusion/limitation of liability clauses;
- material adverse change clauses; and
- broader arguments, including that a party may argue that due process was not followed in executing the contract, that it did not have capacity to enter into the contract, or that it did so under duress or on the basis of a misrepresentation.
Further practical considerations
Beyond considering contractual rights, there are a number of practical considerations that businesses should not overlook in dealing with Covid-19 related disruption. For example:
- Consider insurance coverage and whether any notifications are required.
- The legal concepts above are fact sensitive, so it will be important to keep appropriate records of what has happened and of discussions with counterparties.
- Consider whether any preventative steps can be taken and whether negotiated solutions are desirable/possible.
Rory Conway is a Partner at Linklaters LLP.
Freddie Shanagher is an Associate at Linklaters LLP.