Beware of the dangers of varying contracts during coronavirus outbreak

Following the Prime Minister’s announcement last night and the coronavirus outbreak generally, many businesses face inevitable concerns about their position with their employees and commercial contracts. In this mini-series of articles, our Corporate and Commercial and Disputes teams consider some critical issues which require careful consideration from a legal and commercial perspective, including: (i) the dangers of varying contracts during the coronavirus outbreak (below), (ii) force majeure clauses and frustration and (iii) what your insurance may (and may not) cover.

The coronavirus is already having a substantial impact on well-established supply chains and commercial contracts. This is likely to increase significantly as more stringent ‘lockdown’ measures are put in place this week, not least due to the physical inability to perform contractual obligations. More and more businesses and organisations will be looking closely at their contracts to see how they can manage the impact the outbreak will have, what mitigations there are and, ultimately what possible remedies may be available.
An issue of particular to concern to thousands of businesses throughout the UK will be i) can we afford to pay third parties and ii) will we be paid?

Imagine a scenario where a client/customer, who owes you £500,000 for goods or services already supplied, telephones you to say they are very concerned about the impact of coronavirus on their business and their ability to pay you. They are a long-standing client/customer who you have a good relationship with. They ask you for more time to pay, promising to pay ‘once coronavirus is over’ (a currently open-ended period of time). Whilst that is fine, and it may be commercially/morally the right thing to do, if you agree to such a request there is a real danger that in doing so you have varied the payment terms of the contract or waived your rights in respect of enforcement in some way.
Contract terms can be varied, but it is essential that the proposed variation is fully considered (in light of the provisions of the existing contractual terms) and documented to ensure that your position is protected in the future.

There are several other issues which come into play when one of the parties is unable to perform their contractual obligations, such as the effect of force majeure clauses and the doctrine of frustration.  These are issues which will consider later in this series of updates.

All contracts are different and it is critical that you carefully consider any variations to your contracts, particularly in respect of payment provisions, before agreeing to them. We can advise you in respect of contract re-drafting and how your legal rights may be affected by any proposed variations. Our highly experienced legal teams are on hand around the clock to provide urgent advice should you have any concerns.