Commercial and tech update - May 2020

“Breathing Space” for contract breaches during COVID-19 pandemic?

The recent pandemic and lockdown has meant that lots of companies are considering their contractual positions and looking at whether they have arguments for force majeure, frustration or other termination rights. Where parties to a contract are unable to resolve these issues, the next step is to consider bringing a claim. However, a group of senior judges and legal academics have recommended allowing “breathing space” for contractual breaches caused by the COVID-19 pandemic. They have suggested that litigation, which has a winner and a loser, will not necessarily take into account the full context of the crisis and there may be a “case for adopting a more creative, graded” approach.

The meeting, hosted by the British Institute of International and Comparative Law, was attended by a number of senior judges and legal academics including Lord Phillips and Lord Neuberger, following which a concept note on the effect of the pandemic on commercial contracts was produced (see here for the note). The note states that it is easy to see how damage can be caused by parties triggering default clauses and seeking to terminate contracts, or excuse performance under a contract, which can have a knock-on effect on supply chains. It emphasises the need to be aware that a deluge of litigation and arbitration may reduce the prospect of more constructive solutions and increase uncertainty. According to the note, a number of jurisdictions are already introducing measures to offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligations. The note suggests that it is time for the UK to think about how the role of the law can “safeguard commercial activity, minimise disruption to supply chains and ameliorate the adverse effects of a “plethora of defaults”, by encouraging a legal environment which is conducive to optimism and a global recovery”. According to the note, parties should be trying come up with pragmatic solutions to continue a viable contract at the first instance, rather than seeking to terminate immediately. Speaking about the note, Sir William Blair said: “New thinking is going to be required if the law is to play its full part in getting international commerce back on its feet – within the principle of legal certainty, space needs to be found for renegotiation, and if the contract is no longer viable, equitable solutions”.

The note has no legal standing, but it does represent the opinions of some notable legal experts and gives us an idea of how private contractual law might develop in the future. A similar train of thought is followed by Mr Justice Leggatt who has called for further development of the principle of “good faith” in long-term commercial contracts (or relational contracts). He argued that a duty for parties to cooperate with each other should be implied into relational contracts given that it is impossible to foresee, and therefore contract for, all eventualities that may arise during the term of a long contract, such as a pandemic for example. Additionally, when entering into relational contracts, it is worth considering express good faith provisions so that the first step, when an issue arises, is to cooperate with each other in finding a fair, practical solution.

The take away point from this note is that, while there have been no changes to the law as yet, judges and legal experts are urging contracting parties to try to negotiate and come up with pragmatic solutions to avoid litigation. This may well lead to the courts employing stronger measures in the future to encourage alternative dispute resolution.

Which? launches online tool for the reporting of price gouging

Which? has developed an online tool for consumers to report those profiting from Covid-19 amid concerns that basic products are being sold for hugely inflated prices on online marketplaces (such as Amazon Marketplace and eBay) and other websites and shops across the country. The tool allows consumers to report the product subject to the price increase, the retailer concerned and whether the price increase was implemented before or after lockdown. Users of the tool will also be asked to comment on whether they purchased the product and how the price increase affected them.

Which? has found that prices for some essential items, such as hygiene, personal care and medicinal products, have risen exponentially since the start of the crisis, with some cleaning products being sold by third party sellers at prices almost 1000% higher than the typical prices on eBay. Investigations also revealed that antibacterial gel was being sold for £30 on eBay, a huge increase on the usual price of £3.50, and that price gouging was present in some pharmacies. These price increases have resulted in consumers, including key workers, struggling to get the essential products they need unless they pay extortionate prices.

The Competition and Markets Authority (the “CMA”) has set up a Covid-19 taskforce and the reports created by the Which? tool are designed to help the CMA assess the scale of the problem and whether action needs to be taken. Which? is also demanding legislation to give regulators the power to tackle the price hikes of essential items for the duration of the crisis.

The CMA also has its own online service for reporting unfair business practices which, unlike the Which? tool, covers unfair prices for business and consumer transactions, misleading claims about products or services and issues with cancellations, refunds or exchanges.

High Court dismisses force majeure defence in claim arising from the 2011 London riots

The Covid-19 pandemic has resulted in an explosion of interest in the ability to invoke force majeure clauses. As activity in this area of law continues to evolve in the current crisis, the High Court has laid down a particularly relevant judgment in 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC) this April in which it was held that the London riots of 2011 did not give rise to a force majeure defence.

The claimants were the owners of CDs and DVDs stored in a warehouse owned and occupied by the defendant. In August 2011, during the rioting that occurred across London, a group of young men attacked the warehouse. They accessed the warehouse by breaking open a fire door and once they had stolen some of the goods, they proceeded to set fire to the building causing total destruction of the building, plant, equipment and stock. The claimant sued the defendant for damages. The defendant attempted to rely on the force majeure clause in the logistics services agreement, which read:

"14.1 Neither party shall be liable for its failure or delay in performing any of its obligations hereunder if such failure or delay is caused by circumstances beyond the reasonable control of the party affected including but not limited to industrial action (at either party), fire, flood, wars, armed conflict, terrorist act, riot, civil commotion, malicious damage, explosion, unavailability of fuel, pandemic or governmental or other regulatory action.”

O’Farrell J dismissed the argument. He explained that the force majeure clause exempted each party from breach “caused by circumstances beyond the reasonable control of the party affected” and that the circumstances in this case were not beyond the defendant’s reasonable control.

Under a separate issue relating to the adequacy of the security and fire protection arrangements of the warehouse, O’Farrell J found that the defendant, acting reasonably, could and should have implemented better measures at the warehouse to prevent intruders and/or a fire. The security at the warehouse was poor. The door broken into could easily be overcome and there was no perimeter fence preventing intruders gaining access. In addition, the building did not have sprinklers or compartments to prevent the spread of fire. Therefore, despite the court agreeing that the riots were unprecedented and unforeseen, the risk of intruders, the risk of destruction of the warehouse and its stock and the risk of fire were all foreseeable. Consequently, the defendant’s inability to perform its obligations under the contract was not caused by circumstances that were beyond its reasonable control as the defendant was in control of the security and fire protection measures in place to deal with the risk posed by the riots.

With force majeure remaining at the forefront of people’s minds in the current climate, this case provides a timely reminder that the parties’ position always depends on the terms of the contract, applied to the facts of the situation. It also highlights some of the key points parties should consider to prepare for force majeure events.

CMA guidance for consumers on cancellations and refunds

The CMA has published guidance on when consumers will be entitled to cancellations and refunds for contracts affected by the COVID-19 pandemic (link here.)

The guidance sets out that the CMA would expect consumers to obtain a full refund where they are unable to obtain the services or goods, as a result of the pandemic either because the business cancels the contract or cannot provide the services due to Government measures; or if the consumer cancels or is blocked from using the services due to Government measures. Exceptions may apply where some of the goods and/or services have been received. However, this will likely result in a partial refund, rather than a full exception. The CMA also clarified that it expects cases, where the business can deduct a contribution to costs incurred in connection with the particular contract in question would be rare. Even where the business cannot recover them elsewhere.

In the case of ongoing contracts (where consumers receive regular services in exchange for regular payments) the guidance suggests that for services which cannot be provided, or the consumer cannot use, due to Government measures, consumers can withhold payment or should be offered a refund (which may be a partial refund). A business may require payment of a small contribution to its costs until it resumes providing the service, provided this is clearly and fairly set out in the contract terms. Businesses should also avoid seeking payments for a service it knows it will be unable to provide in the future. The right to a refund for future services paid for in advance appears to depend on whether the services will be able to be provided.

According to the CMA, no admin fee should be charged for processing the above refunds and these rights are likely to apply even where consumers have paid “non-refundable deposits” or “advance payments”. It is possible for businesses to offer credits or re-bookings, as alternatives to refunds; however, consumers shouldn’t be pressured into taking these options and, as always, any restrictions must be fair and clearly indicated to consumers.

Consumers that cancel contracts for other reasons, where the service still can be provided, will be entitled to refunds in accordance with the applicable contract terms (assuming these comply with fairness requirements).