6th May 2020
Whilst the UK enters week seven of lockdown, many countries have already begun to set out ways in which they are considering an easing of their lockdown provisions and a phased return to what is being termed the ‘new normal’. Although a return to some level of normality will be welcomed by many, there are concerns from scientists, politicians and the public alike that there will be a second wave of infection and a second lockdown and therefore any steps taken in the coming weeks and months need to seek to prevent or limit that as far as possible. With the UK Government expected to announce later this week its proposals for the next phase in the battle against the pandemic, now is the time for businesses to plan their response to a lifting of restrictions and how they can react if there is a second wave coupled with a requirement to revert to severe restrictions. Many businesses are likely to be feeling the effect of this already, though for a number of reasons may not be in a hurry to rush back to normal.
It is also important to consider the global impact and the potentially staggered timing of any second wave of infections and lockdown measures around the globe. Businesses are becoming increasingly concerned about the impact on their supply chain arrangements and commercial viability, particularly where operations span multiple jurisdictions with different levels of lockdown and different approaches to lifting the lockdown. Whilst workplaces in the UK may be set to re-open in some capacity, their commercial partners both abroad and at home may or may not be.
Analysing whether or not contractual or common law remedies will allow for flexibility in dealing with the lift of lockdown and the threat of a second wave of infections and lockdown is fundamental to planning for both the short and longer term future.
Many businesses will have spent the last few months adapting and reviewing their commercial arrangements, as well as their obligations and relief under them. Walker Morris has previously provided guidance in respect of contractual obligations in the current pandemic and many business will already have familiarised themselves with these provisions. We revisit these key provisions in light of the lifting of lockdown and the risk of a second wave.
A force majeure clause may excuse parties from performance of contractual obligations following the occurrence of certain events which are outside their control. Many commercial parties will already be relying on a force majeure clause in their contracts to suspend obligations. Businesses should remember that a force majeure clause will have a variety of consequences depending on the drafting of their contract, and that such a clause cannot be implied. Parties should therefore check their contracts carefully to satisfy themselves they have an express provision and determine how it applies in each instance.
The question now is how will a lifting of restrictions affect any current use of a force majeure clause? This will be very much dependent on the specific provisions of each contract. Where force majeure has been called, parties will need to carefully consider what the contractual trigger was, and if a lifting of lockdown measures will mean the end of that force majeure event, thereby bringing an end to the relief it offered. Force majeure clauses often require parties seeking protection to try to mitigate the impact of the event, and to recommence performance as soon as possible once it ends – under some contracts these obligations may kick in once lock-down is lifted. Parties need to be alert to what signifies the end of this event or risk being in breach of contract. Some may risk termination for failure to perform their obligations when the force majeure event ends, even if the lifted provisions of lockdown mean that performance will be difficult, inefficient and/or costly.
Force majeure will not have been available (or called) in many contracts, but many commercial parties have nevertheless reached agreement to allow some level of relief from strict contractual obligations during the pandemic. Often this commercial forbearance has been mutually convenient, as all levels of supply chain and consumer demand have been severely impacted. However, as lockdowns are lifted, pressure may start to build on such arrangements, particularly where they are informal, and particularly where some level of normality returns to parties asymmetrically. Many contracts contain a waiver clause which requires any waiver of strict enforcement of rights to be in writing in order for it to be enforceable. In the case of informal agreements relieving a party of its performance obligations, there may therefore be nothing in the contract to stop the waiving party from requiring full performance once more at any time.
As well as considering the lifting of restrictions and the impact that will have on force majeure rights and any commercially agreed reliefs, businesses also should consider the impact of a potential second-wave and how to prepare for it. If restrictions are re-imposed, there may be an expectation that parties are more adaptable and should have been taking steps to prepare now, so continued or new reliance on force majeure provisions may not be as straight forward, or even possible at all a second time around. Second-wave restrictions may not be exactly the same as the original wave of lockdown, so parties cannot simply assume that they can rely on the same force-majeure provisions as they are currently. Similarly, formal or informal agreements between parties to allow commercial forbearance are less likely to be agreed where there is an expectation that the scale and nature of the disruption should be known in advance.
If a business does want to rely on force majeure again, or is party to a contract where one party is seeking to rely on force-majeure in a second wave, it is important to take the required contractual steps afresh. Don’t assume the other parties know you want to rely on this or that you can escape formalities. Ensure you are complying with any notice provisions, and make sure you are ready to mitigate the impact the second-wave is having. You will likely need to show that you have taken reasonable steps to limit the impact. Remember, a party wishing to rely on a force majeure clause must be able to prove not only that the event in question caused the breach, but also that it was the only cause. If there are steps that could be taken within the supply chain to limit the impact, now would be a prudent time to take them. Time spent working on supply chain resilience, and enhancing business continuity planning now is likely to be time well spent, particularly if a second-wave does strike.
Is termination a risk? Some termination rights arise when there are multiple or long term periods where performance is prevented. If it becomes apparent that there will be a second-wave of restrictions and the impact will be much longer than originally anticipated, parties may want to revisit their termination provisions in their contract. It may no-longer be practical or profitable to continue with certain commercial arrangements and alternative arrangements to adapt business in a second-wave may be needed, so revisiting termination and potentially even the doctrine of frustration (where it becomes impossible to perform a contract) is prudent. However, parties considering terminating a contract, particularly for long-term non-performance due to force majeure, need to carefully consider their timing. If parties wait until lockdown provisions are released they risk the force majeure event coming to an end and potentially wrongfully terminating.
As the impact of COVID-19 looks set to continue for a longer period than some first anticipated, now is also a good time to check for other helpful provisions in your contracts before a second-wave. Force majeure may no-longer be helpful but termination might not be a desirable option. Consider if there are any provisions that may be triggered now to help with the long term effects, such as price review mechanisms and provisions for trading with companies at risk of an insolvency event. It is important to also consider if existing provisions may give rise to new obligations, such as an obligation to provide relevant PPE or to operate in ways which comply with new government guidance. If such new measures are required by the contract, many contracts will default to the cost of such compliance falling on the impacted party (usually a supplier), but some may include a mechanism allocating costs.
Despite the pressures of the pandemic, new arrangements are still being agreed. It is important that any contract where performance could be impacted explicitly deals with this. It will be insufficient to rely on generic clauses for events that could be readily anticipated in the current climate and particularly before an arguably predictable second-wave. Any force majeure clause should be specific about the trigger events and the relief it gives. It will also be important to make sure your agreements are flexible. Are the termination provisions sufficient that you can exit if you need to? Consideration should also be given to serving notice in circumstances where many businesses are closed.
A collaborative approach to variation, dispute resolution and service levels/service credits which may not ordinarily be considered would also be helpful in preparing for a second-wave.
Where you are facing the impacts of the lifting of lockdown and/or a second-wave of restrictions, the following practical tips represent good practice to reacting and dealing with current agreements:
Make sure your new agreements are adapted for both the current situation any second-wave