COVID-19 – risk in contracts and practical tips

The containment measures imposed by the Government have had a significant adverse impact on many businesses in the UK. Supply chains are impacted; there are material labour constraints; planned events which cannot be adapted to the new virtual world are having to be cancelled.

Continuity plans will be under constant review. Such review will include checking how risk is allocated in existing contracts including any notice provisions; and considering appropriate steps to mitigate delays and costs arising from them. Any future contracts will need a sharp eye on the detail of how future risks are addressed.

This article is a summary only of the legal issues on the allocation of risk in a contract. The practicalities however, should not be ignored. Everyone is in the same boat. The other party to the contract is likely to be going through the same, similar or worse experience. Negotiation and use of the change control mechanism in the contract may be of longer term benefit to both parties, recognising the challenge of negotiating all the way down the supply chain.

This article follows on from the article by Nicola Diggle and Heather Welham which sets out the core principles under English and Welsh law which need to be considered when contracts are being reviewed during the COVID-19 crisis.

The article covers risks in contracts including:-

• What’s in the contract? – the governing clause and force majeure
• The interpretation of the force majeure clause
• Notice provisions for force majeure clauses
• Consequences of a force majeure clause
• Other clauses to look out for – including minimum spend and volume provisions, and relief event clauses
• An overview of the law of frustration
• Illegality
• Cancellation clauses

Download our risks in contracts guide in full here.

If you get served with a force majeure notice, you need swiftly to consider whether you should serve similar notices on your head and sub contracts if you are in a chain. If those contracts are not back to back then this can get complicated, In short, as well as considering the enforceability of the notice that has been served on you, you need to think about the knock-on effects.

Negotiation is far better than threats, but do not forget to serve any contractual notices at the same time as negotiating. Hopefully the pandemic is short lived, but the ripples are likely to be felt in millions of contracts around the world for some time to come.