Coronavirus – is your business affected?
The Coronavirus outbreak poses an increasing risk to businesses, particularly those with customers or supply chains in China. According to The Guardian, manufacturers such as Toyota and Volkswagen have already halted production in China with more likely to follow suit. The nature of the disease suggests that other countries may be increasingly affected.
Against this backdrop, businesses should review their contracts with suppliers and customers to understand their options and, where appropriate, put in place continuity arrangements.
The following common contract terms may guide what options are available to businesses:
• Force majeure clauses can protect parties who are unable to perform their contractual obligations because of events outside its control. However, these clauses must be drafted carefully as, if too broadly defined, the clause may unenforceable. The clause should list specific examples such as flooding, epidemics or other natural disasters to ensure that the non-performing business is protected.
• Limitations of liability may assist suppliers who have failed to perform their obligations, resulting in losses to their customers. Equally, businesses relying on suppliers should seek to ensure that such clauses are either removed or restricted so that the business is able to claim appropriate damages from the supplier if the business suffers financial loss due to problems in the supply chain.
• Liquidated Damages obligations A liquidated damages clause pre-sets the damages recoverable for a specified breach, usually for late delivery. The agreed amount payable should be relatively simple and inexpensive to enforce, providing businesses that are affected by delayed supplies with the ability to recover relatively quickly at least some of the losses and/or added expense they may be incurring.
• Termination rights what rights do you have to terminate if you need to extract your business from a contract? For example, because you can no longer supply to your customer, or your supplier is having difficulties in supplying to you and you need to be able to place an order elsewhere.
• Exclusivity is common in longer-term contracts and means that either or both parties are contracted to solely work with the other for a specific period of time. Businesses with exclusivity agreements with their suppliers should be mindful that such clauses may restrict their freedom to enter contracts with alternative suppliers. In these cases, if the contract gives the business a right to terminate on relatively short notice, then the prospect of termination can always be raised as a means of encouraging negotiation with the supplier.
Above all, the benefit of having well drafted commercial contracts are clear. Contracts should also be reviewed frequently and renegotiated where possible if circumstances change. Poorly drafted contacts, including those which fail to deal with uncontrollable events, have the potential to cause businesses to suffer significant financial loss.
If you are worried about how business could be affected by the Coronavirus or you would like advice on your commercial contracts, please contact Carys Thompson at firstname.lastname@example.org or call Carys on 0114 252 1485.