Where do business owners stand if you have contracts in light of COVID19?
By Amanda Hamilton, CEO of National Association of Licenced Paralegals (NALP)
With virtually no business unaffected by COVID19, now really is the time to know where you stand contractually and what legal implications there may be if you cannot provide services to others or they cannot provide services to you that are contractually bound to be fulfilled.
Many believe that to be legally enforceable, a contract must be in writing but his is not the case for simple contracts, although there are a few exceptions (such as contracts for the sale of land or property).
You may be surprised to learn that we actually make verbal contracts all the time without knowing it. For example, public transport: As soon as you make the payment, the transport company has a contract with you to get you to your destination safely and in reasonable time. We’re not asked to sign a contract every time we go on the bus or train but it is, nevertheless, deemed to be a valid contract. If something happens, e.g. a long delay, then we have recourse and can claim compensation.
If you believe you have a verbal contract with someone else, anything that infers this, e.g. an action taken by you which you would not have considered unless there had been a contract in place, or an email trail mentioning certain matters where the only conclusion is that there was a legally binding agreement, is sufficient evidence. You may also have incurred costs.
But what would happen if there’s a valid contract which cannot be fulfilled because of some outside, unforeseen influence such as the situation we currently find ourselves in? Changes to our everyday routines are not only being chosen (for safety reasons) but are also being forced upon us through no fault of either party to the contract.
For example, a manufacturer who’s contractually bound to distribute a certain number of items to a retailer but who cannot fulfil this because his factory workers aren’t working, as they’re self-isolating, and this is a Government Directive that neither party foresaw at the time of making the contract. Can the retailer sue the manufacturer for compensation?
The truth is probably not, as the contract will be deemed to have been frustrated. Frustration is a doctrine in English Contract Law and is defined as an unforeseen event that renders the contractual obligations impossible to perform, thereby relieving the parties of their legal obligations. It excuses non-performance and automatically discharges (terminates) the contract. The only exception to this is where the circumstances may have been foreseeable and therefore avoided, and it is not applicable to certain contracts such as insurance policies.
However, some contracts may have a particular clause added in, which is known as a Force Majeure’ clause. This covers relief from liability if certain events take place making it impossible to fulfil your obligations under a contract. However, the circumstances where ‘Force Majeure’ clauses will kick in have to be specifically identified and they usually cover unforeseen events, such as war, explosions, floods, etc. In some cases, these clauses may also include compliance with Government rules, directives, regulations or laws or other situations, or may specifically mention other circumstances that may affect the supply of goods and services.
If there is no ‘Force Majeure’ clause in the contract, however, then the party against whom the contract is being enforced, may have to fall back on the doctrine of frustration, which is a ‘common law’ doctrine. This means that there may be no legislation or statute referring to this doctrine, but there have been numerous court cases where the court has decided whether or not frustration applies.
In short, if you have a clear contract with a client and you can still, despite the current circumstances, fulfil the services, then both you and client are contractually obligated to do so, and the client is obligated to receive those services and pay for them. That said, if your client can no longer make use of the service or product due to the current situation, then you may decide not to enforce the contract, but rather discuss with them a way to carry it over to better times. This will be a decision each individual business owner needs to make as they consider the future of their business and business relationships.
What about client cancellations?
If you are a client and wish to cancel your contract with a supplier due to the COVID19 virus, then you need first to check if the supplier can actually deliver on the contract – if they can’t, then ‘frustration’ may apply. If they can, then you’d need to look to the ‘Force Majeure’ clause to see if you can exit the contract on that basis. Beyond that, then you may well find that legally you’re obligated to complete the contract and pay the full fees. If this is the case, then it is always best to speak to the supplier as soon as possible to try to find an amicable compromise.
In these very difficult times where many people rely on contracts with others to survive, it is vital that, as a business owner, you know where you stand and what may be the appropriate action to take. This is where a paralegal may assist you if you cannot afford the fees of a solicitor or barrister. A paralegal can also act as a mediator if you need an independent third party to negotiate between supplier and client.
However, don’t forget that almost every business is suffering right now, so finding a compromise that works for both parties will almost certainly be the best way forward.
ABOUT THE AUTHOR
Amanda Hamilton is Chief Executive of the National Association of Licenced Paralegals (NALP), a non-profit Membership Body and the only Paralegal body that is recognised as an awarding organisation by Ofqual (the regulator of qualifications in England). Through its Centres, accredited recognised professional paralegal qualifications are offered for a career as a paralegal professional.