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Covid-19 response: potential impact on contracts and supply chains in the retail and lifestyle sectors

Posted: 07/04/2020


The recent outbreak of the coronavirus (Covid-19) has quickly become a global public health emergency. Not only is the rapid spread of the virus having a catastrophic impact on millions of people’s lives, but it is already having an increasingly negative impact on a wide range of businesses.

The changing commercial landscape and the response that the pandemic has prompted are causing many businesses to review their supply chain arrangements and carefully consider their approach to existing and upcoming contracts, particularly in light of the new legal provisions in force. The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (Regulations) came into force on 26 March 2020 and are the legal basis for sweeping measures that will have a huge impact on shops, hotels and leisure businesses, including (on the supply side) business closures and (on the demand side) restrictions on individual movement. Three sector-specific summaries of the relevant restrictions are illustrated below. These will remain in force from 26 March 2020 until direction is given by the Secretary of State to terminate any of the given restrictions, and will expire after six months (26 September 2020). The first review of the restrictions is due on 16 April 2020. Of course, it is possible that the restrictions could be tightened further before they are wholly or partially relaxed.

Shops: All businesses offering goods for sale or hire (unless a listed exemption) are required to cease their business and close their premises, although they are permitted to continue their e-commerce and delivery channel (and other distance sales by phone or mail order). The businesses that are permitted to continue bricks-and-mortar retail and services include food retailers, off licences, pharmacies, homewares, building supply and hardware stores, car repair and MOT services, dentists and vets. For a full list of these ‘essential businesses’ please refer to Part 3, Schedule 2 of the Regulations.

Although e-commerce remains an option for other retailers, there will of course be capacity challenges in any sudden volume increase within that channel, as well as the marketing challenge of replacing footfall with online presence. It is possible that force majeure may apply to certain obligations within retailer distribution contracts, concerning (for example) in-store stocking and promotion obligations, and minimum sales volumes (the principles of force majeure are discussed below). In fulfilling distance sales, retailers must also bear in mind government guidance (as well as their duties as employers) on social distancing and safe working environments for employees or workers involved in the supply, management and delivery of distance sales; for example, reviewing workers’ shifts in warehouses and putting appropriate protective health measures in place. In addition, under the general restriction of individual movement imposed by the Regulations, any work roles that can be fulfilled remotely must be.

Gyms/leisure facilities: Unsurprisingly, the businesses most directly affected by the Regulations are those that rely on customers attending a physical premises (unless exempted essential services). As such, businesses such as gyms, indoor and outdoor leisure facilities, spas, beauty or massage parlours, as well as entertainment venues such as cinemas, theatres, nightclubs and museums, are among a longer list of businesses forced to close. This does not prevent the broadcast of performances online or via internet or radio for cinemas, theatres, bingo halls, concert halls and museums and galleries. Given the speed with which the Regulations were written however, there are likely to be some gaps or inconsistencies in individual cases, which may be addressed in due course through guidance or revision. For example, and although the Regulations are not explicit on this point, it is difficult to imagine there being a problem with fitness or gym classes provided online - if nothing else, this could be a positive means of retaining member loyalty until normal services resume. In that case, although the Regulations require gyms to cease their business, common sense would suggest that the provision of online fitness classes is not the provision of a ‘gym’ as such, but rather an online media service. Businesses which are funded by subscription models (eg monthly membership payments) and are affected by these closures will need to review their terms and conditions of membership but will most likely be required to suspend subscription payments and refund any payments made which cover a period impacted by the lockdown measures.

Hotels/restaurants: The general position under the Regulations is that any business involving the sale of food or drink on its premises must close that part of its business. This does not prevent the sale of food or drink off-premises (ie providing a takeaway or delivery service) or the continuation of the business via online or remote systems. Any implementation of such off-premises services will, however, need to factor in and comply with government guidance on social distancing. For example, only those people required to carry out the services permitted above will be allowed to enter the premises. Restaurants and cafes may want to consider whether they are able to maintain their in-house business and staff by redirecting these services to off-premises delivery.

Hotels and other providers of holiday accommodation are also required to close under the Regulations, except where accommodation is provided to a person who is unable to return to their main residence, uses that accommodation as their main residence, or needs accommodation while moving house or to attend a funeral. They can also provide accommodation for the homeless, host blood donation sessions, or fulfil any purpose requested by a government authority (eg accommodation of key workers).

Hotels may therefore wish to consider whether any catering capabilities may be able to be redirected to off-premises delivery or the permitted sale of food as outlined above, and/or contact their local authority to discuss the possibility of an alternative function.

For more employment advice during this uncertain period, please see our guidance on furloughing employees under the government’s Coronavirus Job Retention Scheme.

Contracts

Given the business impact of the continued spread of coronavirus and the inherent difficulties around establishing frustration and relying on force majeure, businesses should take the time to understand their current contractual positions and establish a clear strategy and consistent approach to their contractual arrangements. Establishing a robust strategy now should help to ensure that any business is in the strongest position to respond to the current and any worsening impact of the spread of coronavirus. That said, the position is of course changing rapidly, and the position under contracts may alter according to evolving circumstances.

Many businesses, particularly those most affected by the impact of the Regulations, are understandably concerned over their ability to fulfil their contractual obligations during this emergency period while future developments remain unknown. Below, some key issues that businesses ought to be aware of from a legal and contractual perspective are outlined.

Am I still bound by a contract in the event of a global pandemic?

Under English contract law, a party is generally bound to perform its contractual obligations unless the contract expressly provides otherwise or the common law doctrine of frustration applies.

Force majeure

‘Force majeure’ is a term used to describe circumstances beyond the reasonable control of a party to a contract.

The term is derived from French law but has no recognised meaning or consequences under English law. In order to be relied upon, therefore, it must be included in the contract as an express clause.

In broad terms, a force majeure clause will usually excuse a party from the performance of obligations that it cannot perform because of events outside its reasonable control. Even if a force majeure clause is included in a contract, it does not automatically follow that the coronavirus outbreak constitutes a force majeure event. This will largely depend on the specific wording of the relevant clauses, as many clauses list a range of force majeure events as well as general wording around ‘circumstances beyond a party’s reasonable control’. Particular attention should be paid as to whether the obligations under the contract relate to business activities which are now illegal as outlined above or those that are still permitted under the Regulations, even if hampered in practical terms or commercial usefulness. Standard force majeure clauses will often include reference to ‘acts of government’ and as such it is increasingly likely that force majeure may be relied upon where the Regulations or other legal measures relating to the Covid-19 pandemic render normal business activities impossible in practice, if not illegal. Where parties to a supply chain contract are international, businesses should also consider any legal restrictions in force within the relevant countries that may significantly impact on the ability of all parties involved to fulfil their contractual obligations. This may also help in establishing frustration of the contract (see below).

The International Chamber of Commerce includes epidemics as a possible force majeure event within its sample force majeure clause. This may well assist with arguments that the spread of coronavirus and its knock-on effects should be an event beyond a party’s reasonable control for the purposes of a basic force majeure clause that does not expressly list epidemics or similar events.

Once force majeure is defined, the clause will typically go on to outline the consequences of there being a force majeure event. As above, the most commonly agreed consequences are suspension of obligations and liability for the period of the force majeure and, ultimately, a right to terminate if the force majeure event persists. Force majeure provisions also often include specific notification requirements and/or timescales which, if not strictly complied with, may prevent an affected party relying on the clause altogether. These should be considered very carefully in each case.

In the current circumstances, one important issue with force majeure clauses is that they do not (typically) excuse a customer from committed purchases, where external events mean the customer no longer has a business reason to make those purchases. In those cases, what the customer really needs may be a right to suspend or terminate a contract at will (‘for convenience’), or to reduce its purchasing requirements, which may or may not be provided for under that contract. In such cases, it is of course also advisable to seek reasonable commercial compromises through negotiation and agree some scaled-back interim position.

Frustration

Where an express force majeure clause does not exist, there is also the possibility that the contract may be considered to have been ‘frustrated’. Under the common law doctrine of frustration, the parties are no longer bound to perform their contractual obligations if there is a ‘frustrating event’. This is defined as one which:

  • occurs after the contract has been formed;
  • is so fundamental as to go to the ‘root’ of the contract;
  • is neither party’s fault; or
  • renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.

Crucially, the bar for establishing a ‘frustrating event’ is particularly high and the courts will not lightly apply the doctrine to relieve the parties of their contractual obligations. For instance, the impact must be so fundamental that it renders performance impossible, illegal or radically different, rather than just more expensive or less commercially viable.

Frustration also cannot be relied upon where the contract has otherwise expressly provided for the event in question or an alternative means of performance is possible.

While the courts have traditionally applied the doctrine of frustration narrowly, it is not beyond the realms of possibility that the effects of coronavirus could - depending on the specific circumstances - form the basis of a successful frustration claim, particularly given the scale of the outbreak and the knock-on economic impact.

What should we be doing about this?

In order to be in the strongest position to deal with the worsening impact of the spread of coronavirus, businesses would be well advised to consider carefully their supply chain arrangements and agree a strategic approach to both existing and upcoming contractual arrangements.

For existing contractual arrangements, the following actions should be considered:

  • an urgent review that focuses on key strategic contracts and alliances as a priority;
  • in addition to reviewing the existence and terms of any force majeure provisions, businesses should consider any other relevant provisions such as clauses around termination generally, price adjustment, variation, material adverse change, limitation of liability, remedies, business continuity, disaster recovery and dispute resolution;
  • where a business wishes to invoke any force majeure clause, consider carefully the specific procedural, notification and timescale requirements to be complied with;
  • from a practical perspective, businesses may need to consider availability of supplies and make alternative arrangements for sourcing particular goods and services;
  • consider insurance arrangements and whether insurance cover might mitigate any financial impact; and
  • businesses currently able to maintain the provision of services via online or remote means should consider the possibility that further measures may be imposed; for example, worker arrangements in warehouses may become more stringent, and therefore businesses should be proactive in preparing for this where possible.

For new projects and updating template contracts to deal with this and similar threats going forward, the business should:

  • assess the types of events to include within the definition of force majeure;
  • rather than relying on force majeure or indeed frustration, which may well be problematic, consider instead including bespoke provisions to deal with what should happen in any particular circumstances, such as the worsening effects of this and any future pandemic. This can include arrangements around business continuity, price adjustment, renegotiation triggers, temporary suspension and ultimately termination; and
  • contemplate including suitable alternative dispute resolution (ADR) provisions to assist with resolving any disputes over force majeure, other contract terms and the application of the doctrine of frustration.

Any advice contained in this note on the regulatory provisions is considered to be accurate at the time of writing; however, the law may develop as the government reacts to rapidly-changing needs during this period so please continue to monitor our coronavirus hub for updates or speak to a member of the team for current advice.

This article has been co-written with Mary Clare Palmer, a trainee solicitor in the commercial, IP and IT team.


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