Protecting and safeguarding your business has never been more important.
With uncertainty about how long businesses will be closed and how long social distancing policies will be in place, you or your clients may be forced to look at contracts in detail.
(I hasten to add, I don't mean clients will be reviewing their contracts with you - more the contracts they have in place, perhaps as business owners themselves.)
Consumers and businesses exposed to financial constraints may think that ending a contract on the grounds of Covid-19 will help cut costs.
But this is only where there's a very clear and applicable 'force majeure' clause in the contract.
Force majeure clauses aim to excuse one or both parties to a contract from performance of their obligations following an unexpected event or circumstances outside of the party’s control.
Unless this clause exists, a party should be wary about ceasing to act (whether short or long term) or claiming the contract is at an end, as there may not be any contractual or legal grounds to do so.
This could result in there being a breach of contract and a liability to compensate the other party.
Some contracts may be terminated simply with notice and without any need for a breach. If no such mechanism exists, it's worth checking for a force majeure clause on your next contract review.
However, force majeure can't be relied on unless it's an express term of the contract.
Even when it is, the specific clause must either be specific to Covid-19 or wide enough to catch the crisis. It could, for example, fall within the definition of a pandemic, epidemic or acts of government authorities, that is, the closing of businesses.
Not all force majeure clauses give an automatic right to terminate the contract. Instead they may allow extensions of time or suspension of performance while the force majeure event continues.
What if I don't have a force majeure clause?
The current crisis was unexpected and out of the parties' control.
So it could be possible to argue it has impacted on the contract so badly that either performance is impossible, or that the contractual obligations are now radically different to those considered at the time of entering the contract.
In these circumstances, the contract may have been frustrated.
This option looks potentially attractive, as Covid-19 has of course caused significant business interruption, and created supply chain issues throughout various industries.
That said, the fact a business may incur additional expense in meeting its existing obligations is not itself a ground for claiming frustration of contract (nor force majeure).
So, if for example you could honour the supply of goods but at extra expense, the contract is unlikely to be frustrated.
If a contract is frustrated it will be automatically terminated at the point of frustration and future obligations will be discharged.
Generally sums due and payable before the contract was frustrated will still be due. Yet it may be possible to argue that the other party should account for any unjust value which it received before the contract was terminated.
The other option is to consider any existing performance issues.
You can then evaluate whether shortcomings or failures are so serious that they go to the root of the contract, and substantially deprive the innocent party of the absolute benefit the contract was intended to provide. This would constitute what's called a repudiatory breach.
This type of breach of contract allows the innocent party to either treat the contract as having ended and seek damages, or restate the contract and seek damages (as there may be other valuable reasons to keep the contract in place).
Repudiation is a complex area of law and something which is regularly litigated, so should not be pursued without legal advice.
If these legal options for terminating aren't available, or carry too much risk, the obvious practical option would be to speak with the other party and attempt to agree a way forward.
It may be mutually beneficial to bring a contract to an end during this crisis or, if not, to suspend performance or extend time for performance.
Varying the contract could in the long run be a less risky and cheaper option, but of course, this relies on an agreement being reached.
Crucially, any variation to the contract has to be legally binding. Usually variations are required in writing, but the contract may also impose additional conditions.
Wrongful or premature termination of a contract could result in you being in repudiatory breach of contract, so it's recommended you seek advice before taking any action.