In our previous article, which you can read here, we considered whether companies can rely on force majeure clauses if their business is affected by Coronavirus (Covid-19). Invoking a force majeure clause or the doctrine of frustration can provide relief from contractual obligations during this period of economic disruption. However, such severe action may be short-sighted and could have a detrimental and disruptive effect on a business relationship, which may have taken years to establish and develop. Following the enactment of the Health (Preservation and Protection and Other Measures in the Public Interest) Act 2020, which imposes restrictions and forced closure of many industries, most businesses are experiencing serious and damaging negative impacts. It may be beneficial to consider alternative options to manage contractual obligations, with a view to preserving the relationship making it easier to return to business as usual following this crisis.
What other options are available?
Negotiation and Collaboration
Where a party is struggling to meet its contractual obligations and the contract contains a force majeure clause, all obligations specified under the clause, such as notice requirements or attempts at mitigation, should be adhered to. However, this could be followed up on a without prejudice basis with engagement with the other party seeking to negotiate or agree an alternative means of resolution. For example, could an agreement be reached to provide a service or supply of product in a different manner during this period? Could a temporary drop in price be arranged or a payment plan negotiated? Could a temporary barter exchange be put in place, obviating the need for a financial payment and preserving cash flow which might be better used elsewhere? We discussed some of these solutions in our previous article on supply chain management which you can read here.
Another solution may be to engage in mediation to facilitate discussions to find a mutually acceptable agreement. Mediation is a form of alternative dispute resolution where an impartial third party assists the parties to come to a negotiated agreement. The process is confidential and non-binding and should be done on a flexible and voluntary basis allowing the parties to retain control over the final decision. However, mediation may be difficult to coordinate while people are working from home. Cooperating and collaborating with the other party to the contract could provide temporary relief from contractual obligations while maintaining and prolonging the business relationship.
Both parties should closely examine any insurance policies held, as these may cover the losses incurred. For example, a business interruption insurance policy could provide cover if a company’s business is interrupted following a disaster.
It is important to consider the severity of the impact on the other party when invoking a force majeure clause or the doctrine of frustration. While such measures may provide relief in the short term, they may be detrimental in the long term. Flexibility, negotiation and collaboration between parties may be more useful to find an interim solution and mitigate contractual issues during this global crisis.
If you have any specific queries in relation to the Covid-19 virus, please get in touch with your regular William Fry contact. We also have a specific COVID-19 Hubon our website to assist you.
Contributed by Sarah Plunkett