It’s been described as a ‘tsunami of litigation’. Others have called it a ‘deluge of disputes’.
The Cabinet Office, no less, has put out a paper calling for businesses to act responsibly and fairly in the national interest, when performing or enforcing contracts in relation to COVID-19. And two former Supreme Court judges have urged mediation as an alternative to lawsuits.
In short, it appears that post-pandemic, the legal system is bracing for a tidal wave of contractual disputes.
But will such calls for reasonable behaviour and mediation carry much weight? As part-time legal directors for business, we’re not holding out much hope. For as the country slowly comes out of lockdown, signs of that sharp increase in litigation are already building—as several of our clients can attest.
Whatever the much-vaunted ‘new normal’ looks like, the chances appear high that many businesses will find themselves locked into pre-pandemic contractual agreements that no longer appear appropriate for a post-pandemic business environment.
Genuine or convenient contractual disputes after COVID-19
Let’s be blunt. There are two scenarios that apply.
The first is where Covid-19 genuinely has adversely impacted businesses. Delayed construction projects, for instance. Or shuttered pubs, restaurants and leisure centres unable to pay their quarterly rent. Or purchasing contacts now massively excessive for the post-pandemic level of actual demand. It’s not difficult to see instances where a party to a contract might seek to exit or alter a contract, perhaps by claiming force majeure.
The second scenario, though, is where Covid-19 is simply being used as a convenient excuse—a means of conveniently escaping from contractual agreements with which one of the parties had already become unhappy, pre-pandemic.
A difficult employee, customer, or supplier, for instance.
Commercial legal advice that works for your business
In both cases, the Cabinet Office’s advice applies: be reasonable, be fair, think of the national interest, and consider mediation rather than the force of law.
Lofty ideals, you might think. But as commercial and business lawyers, we understand more than most that there are few real winners from a case that reaches the courts.
Settlement of some sort beforehand is usually a far better option—and as legal directors, we try hard to reach those settlements.
But they aren’t always possible. So as coronavirus-related litigation starts to increase, what can businesses do to protect their interests?
Again, there are two scenarios. First, it’s your business that is the one on the receiving end of another party’s attempt to exit or alter a contractual agreement as a supplier . And second, it’s actually your business that is the one seeking to exit or alter a contractual agreement as a client
Let’s look at both.
Contractual Agreements broken in COVID-19:
1) Another party wants to break the contractual agreement
The key things here are to be proactive, and to think ahead in terms of mitigation.
Typically, a party will already be in breach of contract, or be making it very clear that they are likely to be in breach of contract. So it is important to understand what you must do in response, and also to be proactive in doing it.
If the contract states that you should write to the other party, for instance, informing them that they are in breach, then you should think carefully before doing so because you might risk being in breach yourself. Equally, there might be stipulated notice periods or break points: understand the mechanisms of the contract, and make sure that your business at least is following them.
Mitigation in the event of a breach is also important: if the case reaches court, a judge will almost certainly ask what was done to mitigate any loss caused by the other party’s breach. Clearly, you’ll want to demonstrate such a loss—otherwise there is no case—but equally, you’ll want to be able to demonstrate the steps that you took to minimise the severity of the loss.
Key checklist questions:
- Does a written business contract actually exist? (Verbal agreements are more difficult to enforce.)
- Has the other party actually breached that contract?
- Is the scale of the breach—and any consequent loss—enough to cause concern?
- What remedy are you seeking?
2) Your business wants to break the contractual agreement
Here, the key thing is the early involvement of a business contract solicitor, to inspect and advise on the contractual obligations in question plus provide assistance with strategy. There may be notice periods to observe, or break points, or relevant force majeure clauses.
And if a relevant ‘notifiable event’ is applicable, then there will be a prescribed period in which that notification should take place. Don’t miss out by accident: be proactive.
Key checklist questions for commercial or business contracts
- What commitments have you given? And is there a written contract?
- Is there an ability to exit the contract—for example, an applicable force majeure clause?
- If not, is it possible to exit the contract anyway?
- Should you consider simply breaching the contract? What might occur if you did?
Hire a business contract solicitor to help with negotiation
The bottom line
In businesses all over the UK, contractual agreements are being examined and assessed. Contractual commitments that were acceptable pre-pandemic may no longer be so—and awkward decisions have to be made.
Lawsuits are costly, and time-consuming. The Cabinet Office is rightly discouraging businesses from excessive litigation that would clog the courts. There was a backlog in the judicial system even pre-COVID-19 and latest figures suggest this level of delay has increased even more.
With the right legal advice, a different prize is on offer: constructive engagement, and an outcome that satisfies both parties without recourse to litigation.
And as commercial lawyers, we understand more than most the value of such a result.
If you need some advice with your UK business contracts either with clients or suppliers speak to one of our contract lawyers at the The Legal Director.
The Legal Director provides legal services from a business perspective. Our team of business contract solicitors are available part-time or flexibly to help you with your contract law, commercial contracts and general company law.
