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Where do you stand if you have contracts in the current situation?

Tuesday, 05 May 2020

Most – if not all - of us have never experienced a situation like this before. Therefore, it’s important 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. This isn’t the case for simple contracts, although there are a few exceptions.

Verbal contracts

We make verbal contracts all the time without knowing it. For example, public transport: as soon as we make the payment, the transport company has a contract with us to get us to our destination safely and within a reasonable time. We’re not asked to sign a contract every time we go on the bus, train or tube! It’s nevertheless deemed to be a valid contract. If something happens, e.g. a long delay, 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.

Unforeseen circumstances

But what happens if there’s a valid contract which cannot be fulfilled because of some outside influence that’s unforeseen. For example, the situation we currently find ourselves in, where 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. E.g. a car manufacturer contractually bound to distribute a certain number of vehicles to a retailer but who cannot fulfil this because his staff can’t work 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 answer 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.

Contractual clause

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 which may be referred to as ‘act of God’ such things as floods, storms, explosions, 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.

In conclusion, 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 clients wishing to cancel contracts with suppliers?

They first need 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, you may find that legally you’re obligated to complete the contract and pay the full fees.

It’s always best to speak to the supplier as soon as possible to try to find an amicable compromise. In both cases, remember 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. 

In these very difficult times where many people rely on contracts with others to survive, it’s absolutely vital that, as a business owner, you know where you stand and what may be the appropriate action to take.
From: bbp Media - Article By Amanda Hamilton, CEO of National Association of Licenced Paralegals (NALP)News Article

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