Lucy Ward, Partner at Stewarts reflects on how the coronavirus outbreak has affected businesses in the retail world and shares her advice on what businesses should do to cope.
The past month has seen the business world go through some unprecedented changes thanks to the coronavirus pandemic. Unsurprisingly, while all corners of the economy have been impacted, one of the sectors most severely harmed so far is the retail industry.
There is no doubt that the high street has been well and truly hit. Some of the UK’s biggest brands have suffered severe to mild effects, from Primark and Debenhams, to Topshop, Sports Direct and M&S. As a result, businesses are increasingly apprehensive about what the future holds and now, more than ever, are uneasy about the state of their contractual obligations, whether that’s with suppliers or landlords.
The future of a business, and its economic success, depends on what actions are taken in the early stage of a crisis scenario such as the coronavirus situation. The retail sector will undoubtedly see numerous contract breaches and damages claims in the coming weeks.
As lawyers specialising in commercial disputes, we have already received requests for advice from parties that cannot perform their contractual obligations as a result of coronavirus. So what exactly should retail businesses be aware of?
Breach of contract
If a business cannot meet the terms set out in a contract, it could be liable for damages. The other party may also be entitled to terminate the contract altogether.
However, in some circumstances the defaulting party may be protected from liability for non-performance. The potential way outs include ‘force majeure’ or ‘frustration’.
Force majeure – what does it mean?
Many contracts will contain ‘force majeure’ clauses, meaning that non-performance may be excused if events beyond the parties’ control prevent or hinder performance. Each contract is different but the clause may cover specific events such as ‘acts of God’, epidemics, or government actions which should all apply to coronavirus.
But, retailers should not consider it to be a silver bullet.
How can businesses invoke force majeure in light of coronavirus?
Many force majeure clauses will require a business to show that performance is impossible – not just that it is more difficult or expensive.
The business needs to assess whether it can honour the contract in another way – such as by remote working, or sourcing replacement goods or services from a country which is not affected.
The force majeure event must also be the only cause of a business’ failure to comply with the contract. Businesses will not be able to rely on force majeure for example, if they were unable to perform before the COVID-19 outbreak.
Businesses also need to check their notification obligations – often they must notify the other party of their inability to perform as soon as possible.
How else can retail businesses seek to make claims right now?
If contracts do not contain a force majeure clause, it is possible for businesses to claim that the COVID-19 outbreak has ‘frustrated’ the agreement. Frustration occurs when an unforeseen event – outside the control of the parties – makes it impossible to perform contractual obligations.
An agreement can be terminated automatically if a claim for frustration is successful. Despite the rarity of this, the unprecedented nature of the COVID-19 outbreak means that it is likely that many businesses will be claiming frustration during this time.
With rent a key issue for many retail businesses right now – especially with cashflow somewhat reduced – tenants are seeking to agree suspension or reduction of their rent for a period of time. Unfortunately though, retailers will struggle to dispute their rental contracts via force majeure (which is rarely found in leases) or frustration.
The high street has been under increasing pressure for a while now. The COVID-19 outbreak has added another considerable strain on retail businesses, so it’s important that they take the right steps to safeguard themselves as much as possible during these unprecedented circumstances. Unfortunately, retail businesses invoking force majeure or frustration is likely to result in costly litigation, potentially extending further uncertainty for the industry even after the current crisis has begun to dissipate.
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