Following on from our “Part I: COVID-19 – What Can You Do right now?” article, focusing on commercial contracts and force majeure, this is our second article taking on the COVID-19 pandemic form a commercial perspective, this time focusing on Supplier Agreements and any clauses within these, that may assist you right now.
We have set out three articles for you, Part I helps to explain your position on commercial contracts and force majeure; this article for Supplier Agreements; and Part III for Agency Agreements.
If you have any Supplier Agreements currently in use, whether or not they were drafted by lawyers, and no matter when they were entered into (providing that they have not been terminated), here are some helpful tips to understand where you stand when it comes to your contractual relationships; any obligations you may have in light of COVID-19; and the clauses that may assist as a starting point.
Force majeure clause
It is likely that your Supplier Agreement includes a force majeure (FM) clause. An FM clause seeks to set out party obligations when the occurrence of a specific event makes it impossible for the affected party to perform their contractual responsibilities. FM events are usually defined as acts events or circumstances beyond the reasonable control of the party concerned, but whether an event is considered as an FM event will depend entirely on the wording of the contracts FM clause. Please see our “Part I: COVID-19 – What Can You Do right now?” article for more information on how to understand your FM clause and any effects an FM event may have to your Supplier Agreement.
Where an FM clause in your Supplier Agreement has been vaguely drafted; doesn’t cover (or doesn’t cover clearly) the scenario or event; or, doesn’t fully set out the consequences of invoking the FM clause, you may find yourself in the murky waters of the laws of frustration, contra proferentum… or even having to revert to a foreign lawyer in the absence of an E&W jurisdiction clause. Nick Parkinson has offered advice in such predicament, in his article ‘Where Do We Stand With Our Suppliers?’
Does your Supplier Agreement include a limitation of liability clause? Contracts between businesses commonly include a clause that seeks to impose the liability of either one or both parties to the contract. Such limitation can be identified in a contract where the clause includes words to the effect of: The [PARTY’S] liability under or in connection with this Agreement shall be limited to £[SUM] for each and every claim arising out of the same originating cause or source. This limit shall apply however that liability arises, including, without limitation, a liability arising by breach of contract, arising by tort (including, without limitation, the tort of negligence) or arising by breach of statutory duty.
The safest way to limit a liability, is by including clear words – as the clause above limits liability for claims in breach of contract. A liability clause will normally be ineffective if it seeks to exclude certain liabilities, such as fraud, personal injury or death; is not reasonable under the Unfair Contract Terms Act 1977; or excludes all liability whatsoever.
Nevertheless, in scenarios where you are at risk of incurring liabilities to either a supplier or indeed another third party as a result of the COVID-19 pandemic and there is no FM clause or an ineffective FM clause in place, it is worth considering whether there is a limitation of liability clause in place that would offer some protection.
Termination of an agreement may occur at the end of a fixed term, or on the occurrence of an event. Ordinarily this means that the contract (and most of the clauses within it) will have ended, excusing the parties of their primary obligations. A termination clause may begin: Either party shall be entitled at any time to terminate this Agreement without penalty on the happening of any of the following events…
However, your FM clause may set out the effects of an FM event: and this could potentially allow your Supplier Agreement to be terminated in accordance with a termination clause. This may offer some assistance, if a contract has become undesirable to perform as a result of the COVID-19 pandemic.
Ordinarily, parties will also need to check the commercial terms of the Supplier Agreement, along with all the legal terms above, to see what will happen if, or when, termination occurs. For example, what will happen to the services not provided? Will the supplier provide refunds for these services? On the other hand, will the parties miss any payment deadlines? What about outstanding monies?
Hopefully, your Supplier Agreement is clear about such arrangements, but where it is not, it may involve mutual discussions so that amicable resolutions can be reached.
Please contact us if you would like to discuss this further.
This article was originally published on: 2 April 2020