Outsourced relationships will come “under significant pressure” due to the coronavirus outbreak.
Law firm RPC said the virus had caused significant disruption to the services sector in the UK and key outsourcing centres such as India, and it was “inevitable” this would affect relationships.
RPC warned disruption alone would not be sufficient as a reason not to deliver on a contract and firms should be “cautious” around citing force majeure or “frustration”.
“Will suppliers and customers try to cite the outbreak and ‘lockdown’ as reasons not to perform contracts?” said RPC.
“Most outsourcing contracts used by UK businesses are drafted so that disruption alone will not be sufficient as a reason to not deliver on a contract.
“Parties to outsourcing arrangements may try to argue that their contract has been ‘frustrated’ (leading to automatic termination) or that a ‘force majeure event’ has occurred (leading to a relief from liability and, in some contracts, termination).”
But Charles Buckwork, partner at RPC, warned: “Parties should be cautious about rushing to invoke common law or contractual rights in this way, as this could quickly land them in litigation.
“The English courts have traditionally not looked favourably on parties trying to escape from their side of performing a contract.”
He continued: “The threshold to establish ‘frustration’ is very high. The party will need to prove that an event has occurred which is unexpected, is beyond the control of the parties and either makes performance impossible, illegal or radically different from those contemplated by the parties at the time of contracting.”
RPC said many commercial contracts include a force majeure clause, which excuses a party from performing their obligations in the contract under certain circumstances which are out of the control of the parties.
But whether or not the current circumstances qualify will depend on the drafting of the relevant clause.
Mark Crichard, partner at RPC, said: “Force majeure clauses are rarely get-out-of-jail-free cards. Parties will have to demonstrate that the events are covered by the relevant clause [were] out of their control and, often, that they couldn't be planned for, avoided or worked around.”
“Further, parties will often be under obligations to take efforts (including incurring significant expense) to continue performance. We are already seeing many suppliers doing that as they are investing in remote working facilities.”
RPC said suppliers and their customers should take a pragmatic approach to resolving disputes and outsourcers should negotiate with their customers and communicate any issues they may be experiencing, rather than breach the terms of their contract.
Crichard said: “It will be in the interest of both parties to resolve any issues in a way that develops and strengthens the commercial relationship, rather than burn bridges.”
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