What should contracting parties do when COVID-19 is claimed as: Force Majeure, or a cause of disruption or when rent is not paid?

What should contracting parties do when COVID-19 is claimed as: Force Majeure, or a cause of disruption or when rent is not paid?

What should contracting parties do when COVID-19 is claimed as: Force Majeure, a cause of disruption or when rent is not paid?

This was a question raised in the webinar held by the Chartered Institute of Arbitrators on 28 May 2020 entitled “Question Time: Disputes in a COVID-19 World”. Stevens & Bolton partner Michael Frisby, a panellist on the webinar, sets out his answer below.

 

Follow the contract first and foremost. You need essentially to: 

  1. Understand your legal position, rights and liabilities
  2. Consider what outcomes might be involved in exercising your rights (including the ability to pay off your counterparty); and
  3. Set commercial objectives – which might point to litigation/arbitration or settlement or re-negotiation of commercial terms

Understand your legal position, rights and liabilities

Read the contract and understand what it means. A contract is viewed as a whole and against the relevant factual matrix, clauses are not looked at in isolation. Whether you can rely on a Force Majeure clause will turn on exactly what it says, interpreted against the other terms of the contract and in light of the factual position. Similarly disruption clauses; what does the contract say? Is there a relevant event?

COVID-19 has had a global impact. At the end of last year the World Health Organisation was first informed by China of "pneumonia of unknown cause". On 21 January 2020 the WHO published its first situation report; at that time cases affected 4 countries: China, Thailand, Japan and Republic of Korea. It then spread, with different Governments acting in differing ways. Back in February it was a cross-border issue – businesses had concerns over delay on their contracts as a result of supply issues caused by the shutdown of Chinese factories. It quickly became a domestic issue in the UK. On 16 March 2020 the Prime Minister asked the public to stop non-essential contact with others, to stop all unnecessary travel, avoid pubs, clubs and theatres and work from home if possible. The lockdown came in on 23 March 2020 and The Coronovirus Act 2020 on 25 March 2020.

Analysing your contractual position against the relevant background, understanding exactly what performance was or was not possible at any given time, could prove to be an area ripe for dispute. 

Exercising your rights - how easy is it currently?

Not surprisingly, there is a concern that with the disruption of lockdown, there will be many potentially ruinous disputes. The Government is taking steps to mitigate that risk. I will give 3 examples:

  • Section 82, Coronavirus Act 2020: provides protection from forfeiture for business tenants. This protection applies until the end of June 2020 but that period can be extended.
  • Corporate Insolvency and Governance Bill: is due for 2nd reading in Parliament next week and is likely to become law in June 2020. Amongst many other provisions, it contains clauses which have the effect of invalidating a winding up petition presented on the basis of any statutory demand served in the period 1 March 2020 to the end of June 2020 (and that period might be extended).
  • Cabinet Office - Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency: this was published on 7 May 2020. It gives guidance that “parties to contracts should act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy”.

The first two examples are legally binding. The Cabinet Office guidance however is not.

The aim of the Cabinet Office guidance is: to ensure cash flow, ensure contractual and economic activity is preserved, where possible ensure continued contractual performance and where not possible to avoid destructive disputes and insolvencies.

Understanding exactly what is meant by “acting reasonably and fairly” against the background of a contract where the parties have already agreed risk allocation between themselves is difficult enough. It seems to inject a duty of altruism that is alien to the English law of contract; parties exercise their contractual rights for their own commercial reasons, not to “support the response to Covid-19 and protect jobs and the economy”. If this is construed as an attempt to re-write contracts, then this is worrying. However, the guidance does say that it is not intended to override specific contracts whose primary purpose is to make express and clear provision for and allocate risks in respect of the effects of pandemic. It is said to be non-statutory guidance but the Government strongly encourages parties to contracts to follow the guidance. 

The question arises then as to whether Cabinet Office guidance has any relevance. It is perhaps worth bearing in mind the following possibilities:

  • This guidance might be raised against a party exercising contractual rights in some way, even recognising that it is guidance only
  • It may inform the way in which dispute resolvers (for example judges and arbitrators) exercise discretion (raising the risk of unpredictable outcomes); and
  • It could point to legislation or further action by the Government if the aims of the guidance do not have the desired effect. Could that mean for example the possibility of compulsory mediation as a pre-cursor to legal proceedings?

So in exercising your rights and coming up with a strategy, parties need to be alive to these points.

Setting commercial objectives

Be realistic in the outcome you wish to achieve. A perfect legal case is not much good if your opponent cannot pay. Where there is an ongoing commercial relationship in prospect, with a key supplier or customer, a deal will often be the best solution. You should take care to reserve your rights and take all necessary steps under the contract to preserve your position (in case a deal cannot be done) and engage with your counterparty on a without prejudice basis to try and reach a solution. Where necessary, formal dispute resolution procedures can be invoked to help achieve your commercial objective.

Reverting to the final example in the original question – it specifically refers to overdue rent and what can be done. Forfeiture is off the table for now as I have explained, but you can get a judgment. Enforcement might be tricky. You cannot issue a statutory demand and then present a winding up petition currently either. However, a landlord can enforce guarantees and go against rent deposits.

 

To view the full webinar, please click here.

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