We are pleased this morning to bring you a guest post from Sport for Business member Edward Evans at Beauchamp Solicitors looking at the different options which might apply to contracts between sports and business partners in these most challenging of times.
It goes without saying that the COVID-19 epidemic poses significant issues for businesses. The closure of non-essential retail outlets, restrictions on all but essential services and on non-essential travel have resulted in the cancellation of many events and the disruption to supply chains.
Irish businesses and those operating in other affected countries have been forced to suspend operations or find alternative means of working. Affected businesses may need to consider contractual and legal issues arising from this situation.
As a general rule under Irish law, a business that has trouble performing a contract will be potentially liable to the other party for failure to do so. However, there are exceptions to this rule.
Many commercial contracts contain a force majeure clause. Where a force majeure provision applies it may allow a contracting party to avoid liability where the delay or failure to perform is due to an event outside its control.
Whether a force majeure clause may be successfully triggered will depend on the exact words that the parties have used in the contract. Where a contract contains a force majeure clause, it will usually deal specifically with the parties’ obligations when an event occurs that impacts on one party’s ability to perform its obligations under the contract.
In the absence of a force majeure clause, parties might have recourse to the common law doctrine of frustration. This provides that a party is discharged from its contractual obligations if an unforeseen change in circumstances makes it impossible to perform the contract or would render performance radically different.
There is a very high bar to establishing that a contract has been frustrated and the circumstances where it can be invoked are few.
Force majeure and frustration may give parties the opportunity to terminate a contract that can’t be performed, however, more and more parties are seeking alternatives to terminating or enforcing contracts.
There are several options open to parties who find themselves unable to carry out their obligations under a contract.
First and foremost, the parties should communicate. If a business affected by the public health restrictions is worried about not being able to comply with its obligations under a contract, it should pro-actively engage with the other party, seek to compromise on the terms of the contract and propose reasonable alternatives.
Examples of the types of compromise that can be reached are:
• Extending the contract – allowing the party in difficulty more time to perform their obligations by extending the term of the contract by six months or a year.
• Stretching out payments – similar to a mortgage or rent “holiday” or credit standstill, allowing more time to make payment.
• Consider other things that could be delivered. If, for example, payment has already been made on the assumption that something would be done or delivered, which now is impossible to provide or to do, can something else be provided instead? For example, can a supplier provide similar goods, which are in stock, instead of the contracted goods?
• Consider waiver, reduction or deferral of obligations. For example, a contract to supply goods could be amended to allow the supplier to deliver less or deliver slower.
Documenting Your Compromise
Rather than re-negotiating an entire agreement, parties are looking to amend agreed terms by side letter or simple amendment agreement, setting out the revisions or adjustments to the contract.
Such side letters should include a review clause, such that in three or six months the parties can evaluate how the revised terms are working. However, the parties should continue to communicate and keep each other informed of any developments, good or bad.
How will the current crisis impact on Future contracts?
Given the effect the COVID-19 crises has had and continues to have on businesses, commercial contracts will likely include a compensation methodology with key performance indicators.
Most contracts (there are exceptions) don’t provide for compensation for non-delivery.
As a solution, contracts could provide for this in a schedule, as is common with service level agreements in the IT sector.
Another example of this in current practice can be found in employment contracts, which often allow for so many days out sick, and then reduced payment for so many days after that.
One thing we are seeing is that there are many ways to work around situations where a contract can’t be performed in the current climate. All depends on the fact pattern and whether part performance can be allowed or whether delivery, as agreed, is “mission-critical”.
Edward Evans is a partner in Beauchamp’s Corporate and Commercial team. He works with a range of domestic and international clients in various industries sectors including sports, banking and insurance, software, retail and manufacturing, distribution and logistics. He can be contacted here.