During this unprecedented period of Covid19 isolation, and the inevitable economic downturn, we want to ensure that all of our brand owning clients are aware of the UK contractual and common law issues which arise out of your relationships with licensees, suppliers, distributors and third parties. It may be that you will face issues of non-payment of quarterly royalties by licensees (with the end of Q1 almost upon us), defaults in your supply chain with your suppliers unable to source materials, a reduction in the ability of your contracted distributors to meet orders, and other operational issues arising out of your day-to-day contractual relations.
For the continuation of the Coronavirus, it may be that your priority is to preserve commercial relations and to collaborate with your partners/contracting parties, in which case you might want to consider an express variation to the contractual terms for a limited period to avoid any uncertainty (e.g. a six month relief from royalty period, a contract extension or an early exit). A consultative and transparent approach will help preserve key relationships. We are happy to assist in proactive conversations with your licensees/contracting parties and would encourage establishing exactly what the situation is and what it is likely to look like over the next 6 months.
The alternative is to take more drastic action in seeking to enforce your contractual rights or terminate the contract. The purpose of this note is to flag the sorts of issues that you will need to consider in those circumstances and to re-assure you that we are well-placed at Stobbs, with our team of solicitors and litigators, to help and support you with all the advice you will need, from initial queries on how the relevant clauses of your contracts should be construed, to needing to escalate to further action and potentially litigation should the situation require.
A Force Majeure clause is a contractual provision specifically designed to excuse non-performance and/or to exclude liability (usually for a limited time) in the occurrence of an event which is beyond the control of the parties and where, typically, neither party is at fault.
Construction of Force Majeure Clauses
The first thing to do, when faced with a defaulting party, is to check whether your contract contains a Force Majeure clause. Most but not all IP licences and day-to-day operational contracts will contain such a clause. As with all contractual terms, the purpose and effect of a Force Majeure clause will depend upon the precise language used and how it is likely to be construed by a court, taking into account the wording of the contract as a whole and the factual matrix at the time the parties entered into the contract.
Force Majeure clauses are usually treated by contracting parties as boilerplate clauses (and appear towards the end of your contract) which are rarely given much specific attention during contract negotiations. Even if you don’t have a dedicated Force Majeure clause, equivalent provisions may appear within the body of a termination clause or an exclusion of liability clause.
Not all Force Majeure clauses will cover the current situation so it is important to pore closely over the exact wording used. For example:
· It may contain very broad language, such as “due to events beyond the control of the parties”, which should cover Coronavirus.
· It may contain examples of Force Majeure events, such as disease, epidemic/pandemic, government actions or enactments, which again should cover Coronavirus.
· It may be more contentious and contain examples of Force Majeure events such as acts of terrorism, acts of war or acts of God, leading to a theological debate in order to construe the clause!
Equally, the purpose and effect of a Force Majeure clause will vary:
· Does it need to be specifically triggered, by one of the parties serving notice of a Force Majeure event?
· Does the Force Majeure event have to prevent performance or merely make it more difficult?
· Does the clause entitle the suspension of contractual obligations, in whole or in part, and if so for how long?
· Does it provide for a re-negotiation of key terms within a certain time period?
· Does it provide for an extension of time for certain obligations to be performed? If so, is any compensation payable?
· Does it entitle the termination of the contract, either immediately or at the expiry of the extended period?
If your contracts are governed by English law and you would like assistance in determining whether a specific Force Majeure clause is likely to apply in the current situation, please contact us and we will be happy to provide our view.
You may be aware that the UK courts are willing to imply terms even where the contract does not contain appropriate express terms, in situations where it must have been the common intention of the parties. However this is unlikely to be the case for Force Majeure clauses. They are standard clauses and if the parties did not include one, the starting point will be that neither side can have intended the contract to be suspended or cancelled for a Force Majeure event. Also the UK courts are reluctant to imply terms without being able to do so with sufficient certainty of terms, specifically where the effect of such a term would have such a dramatic impact on the contract as to suspend/cancel performance and/or exclude liability.
If, therefore, your contract has no express Force Majeure clause, you will need to consider the common law doctrine of frustration (see below).
Importantly, even if there is a Force Majeure clause, it will not necessarily be triggered by current events. There needs to be a sufficient factual link (in legal jargon, “causation”) between the non-performance of the contract and the Force Majeure event. So for example:
Invoking a Force Majeure Clause
Again, this will require close scrutiny of the exact wording of the clause, but as Force Majeure clauses often act as a temporary suspension of contractual obligations, the onus is on the defaulting party to:
· serve a Force Majeure notice invoking the Force Majeure event
· establish that Covid19 does indeed fall within the events referred to in the clause
· establish causation, namely that the reason for the inability to perform the obligation is Covid19
· establish that there were no reasonable mitigation steps which it could have taken to avoid or reduce the impact of Covid19
In the absence of the defaulting party triggering the Force Majeure clause, the contractual obligations will continue to apply as normal. Trying to find a silver lining in the current situation, if you have contracting parties which you have been wanting to terminate for some time, forcing them to trigger a Force Majeure event (by otherwise requiring performance as normal) and thereby enabling you ultimately to terminate the contact, may be a good opportunity.
Unlike Force Majeure, which is a contractual term, the English common law doctrine of frustration of contracts applies without any contractual clause. Under the doctrine of frustration, if as a result of an unforeseen and outside event (1) the contract becomes impossible to perform, or (2) the contractual obligations are rendered substantially different to what had been agreed when the parties entered into the contract, the contracting parties are automatically released from their obligations and the contract is brought to an immediate end as a matter of law.
As the result of frustration is so drastic, the legal threshold for a contract to be treated as frustrated is very high.
Typically, as with Force Majeure, the frustrating event will not be the fault of either party. If there is a Force Majeure clause which sets out a mechanism as to what is to happen in case of an event like Covid19, then the doctrine of frustration is less likely to apply and the Force Majeure clause will take precedence.
Essentially the legal test is that performance of the contract as originally contemplated has become impossible because the contract has become something radically different from what was originally promised. Even with Covid19, it is going to be a contentious step to claim that a contract has been frustrated. There is case law making it clear that even for cancellation of an expected event, contracts will only be frustrated in exceptional circumstances, particularly if the event could be delayed rather than cancelled outright. For delay to performance obligations, it will be a question of fact and degree and with the current uncertainty, you should not assume that it will be easy to declare a contract frustrated.
Whether or not a contract will be capable of being deemed terminated for frustration will be very fact specific. Again, if your contracts are governed by English law we will be happy to discuss particular scenarios with you in order to determine whether or not a frustrating event may have occurred and what the legal impact of that will be, for example in relation to payments already made under a contract which has now been frustrated.
If you would like to discuss further, please contact Geoff Steward