Minimum purchase/volume commitments & lockdown – a trap for the unprepared?
James Phinn, 1st June, 2020
Gosschalks commercial contracts team has already covered the possible impact of Covid-19 on commercial contracts, in terms of the range of possible reliefs available to a party for being unable to perform its obligations due to the impact of Coronavirus and the associated government measures (such as the lockdown).
You can read this associated article by clicking or tapping here.
These reliefs include the possibility of relying on ‘Force Majeure’ provisions within the contract, which subject to any procedural requirements stated (for example the need to serve formal notice on the other party, and if necessary trying to perform some obligations where possible), will often provide contractual protection from non-performance or delays which are caused by the pandemic and associated measures taken to combat the virus.
It remains important that contracts are examined to establish whether ‘Force Majeure’ or other reliefs are available, and that the relevant procedures have been followed in order to take advantage of these where that is possible - often the requirement to serve formal notice is overlooked (as the assumption is wrongly made that “all bets are off” in a situation like this), or a party may be obliged to show that certain obligations are belatedly performed as soon as circumstances allow.
Unfortunately Force Majeure relief will not relieve performance of all obligations, however, and payment obligations should in theory not be permanently affected (although possibly delayed) as the non-availability of funds is not usually accepted as an acceptable consequence of the Force Majeure event. Where this is the case, non-payment will of course continue to be actionable by the other party in the usual way.
One other area of potential concern, particularly as the lockdown is eased and businesses assess the damage caused, concerns minimum purchase obligations (MPO), minimum order/volume thresholds, minimum sales targets and other provisions of this kind which are commonly included in commercial agreements in order to counterbalance preferential pricing, territorial exclusivity or other commercial concessions given by the other party under the contract.
These minimum commitments are likely to be very difficult to meet for many businesses who have not been able to operate for an extended period during the lockdown, and potential shortfalls will be crystallised when year-end periods fall due over the coming months – some will course already have crystallised during the lockdown.
The way in which these minimum commitments are drafted within the contract is very important in determining whether business interruptions due to Covid-19 will allow any concession or adjustments (i.e. some kind of “leeway”) to the minimum levels stated in the current circumstances – the devil is very much in the detail here, and a legal overview will be needed. Often, however, Force Majeure will not assist in these cases and the affected party will potentially be in breach of contract, and liable to pay compensation (via a damages claim), and possibly also face termination of the contract ‘for cause’.
Where it is not possible for a party to rely on a Force Majeure clause, an affected party may be able to argue that the contract has been “frustrated” due to the impact of the pandemic such that it should be treated as having been brought to an end (under the doctrine of ‘frustration of contracts’ under English law), meaning that it no longer has to be performed. This will require specialist legal advice, however, and it may well not be in that party’s interest to try to argue for an end to the agreement in this way, if it is an important revenue-bearing contract moving forwards out of the lockdown.
As ever, the most likely outcome is a sensible commercial discussion between the parties to reach mutually agreeable settlement terms where liability does arise, to reset the relationship for future business together – the commercial show must go on!
Want to chat through your options with one of our specialists?
Gosschalks’ Commercial team can assist if you require an opinion on a commercial contract, or need some assistance in serving notices or renegotiating and redrafting the contract terms. If you want to chat through any of these issues, please get in touch with James Phinn (firstname.lastname@example.org) or Phil Osborne (email@example.com).