The supply of components to my business from Italy is late and I don’t know when they will be delivered because of coronavirus (COVID-19). I am about to miss the deadline to supply my products to a customer, what can I do?

The supply of components to my business from Italy is late and I don’t know when they will be delivered because of coronavirus (COVID-19). I am about to miss the deadline to supply my products to a customer, what can I do?

Produced in partnership with Lynne Counsell of 9 Stone Buildings

This Q&A assumes that both the contract with the supplier and the contract with the customer are subject to English law.

Breach of contract

There are two potential breaches in the scenario—that of the supplier of the components to the owner and that of the owner to the customer. The breach is the failure to supply the relevant goods or delay in doing so. The principles outlined below would be applicable to either breach.

The remedies available are damages for breach of contract for loss suffered and/or termination of the contract. See: Remedies for breach of contract—overview.

In the absence of a specific termination right covering the relevant circumstances, a contract cannot automatically be terminated by the innocent party in the event of a breach. In order to justify termination, the breach must be serious enough as to amount to a repudiatory breach. For further information, see Practice Notes: Termination for breach of contract and Repudiation.

If the contract has specific termination provisions in the contract, these should be reviewed to see if they apply. See Precedent: Termination clause and associated Drafting Notes.

Is time of the essence?

Time of the essence clauses are often dealt with by the courts as examples of conditions or intermediate terms, the breach of which goes to the root of the contract and is treated as repudiation. However, although there is a long line of authorities which effectively conflate ‘time of the essence’ clauses with conditions and repudiatory breach, each situation will depend on the construction of the contract in question, the surrounding circumstances and the courts’ interpretation of the intentions of the parties. 

There is no general concept that time is of the essence in relation to a contract as a whole. The question in each case is whether time is of the essence in relation to a particular term of the contract. Where time is not of the essence or there is no date specified for performance, then performance should take place within a reasonable period.

Time can be made of the essence where a notice is served making time of the essence provided that:

• the giver of the notice has not caused or contributed to the delay and is ready, willing and able to perform its obligations under the contract

• the recipient of the notice must be guilty of unreasonable delay in performance of one or more obligations. ‘Unreasonable delay’ will be assessed having regard to the particular circumstances of the case. Such a notice may only be given on default

• the notice sets a reasonable period within which completion is to take place

The owner will have to consider whether it is under a time of the essence obligations to the customer and whether it has or can impose the same obligation on its supplier. If there is a mismatch between obligations, the owner in the middle may carry the risk of its supplier’s delay in supply.

For further information, see Practice Note: Time of the essence.

Termination for delay

If the contract is silent on the question of delay, the courts have provided guidance as to when delay in performance can justify determining the contract. The court first has to consider the benefit which the innocent party was meant to receive under the contract and then the effect of the breach: Telford Homes (Creekside) Limited v Ampurius Nu Homes Holdings Limited. In assessing effect, the following factors must be considered:

• the financial loss and any benefit to the innocent party

• the adequacy of any damages award

• whether there is likely to be a repetition of the breach

• whether the party in breach will resume compliance with its obligations

• whether the breach has fundamentally changes the value of the outstanding obligations

Force majeure clause

The contract may contain a force majeure clause. This is in the following general form: ‘Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any obligation under this Agreement when such failure or delay is caused by or results from factors beyond its [reasonable] control’.

The clause would usually go on to specify particular events ‘including, but not limited to’ acts such as fire, floods, acts of war or terrorism, military or civil  disturbances, nuclear or natural catastrophes, Acts of God or actions by governments. Such a clause can include events such as disease, epidemic or pandemic. If the clause does include this wording, coronavirus (COVID-19) is likely be included as the World Health Organisation declared on 11 March 2010 that this was a pandemic. Even if the clause did not include such wording, it could fall within being an Act of God, acts of a government or the general inclusionary provision. Coronavirus is not itself the relevant event—it is the impact of it on the ability to fulfil the contractual obligations, such as the lockdown in Italy and restrictions on movements.

If the delay is caused by a force majeure event as defined in the contract, and the supplier has invoked the provisions of the force majeure clause by giving notice, it is likely that the time for performance of the supplier’s obligations under the contract will be extended. During this period the supplier would not be in breach of contract. There could in addition be a right to terminate the contract if the force majeure event persists beyond a given period. If the supplier is not in breach of the contract because obligations are suspended, there is no right to claim damages arising from such non-performance.

The customer will need to check that it has back to back force majeure provisions in its contract with the end customer to ensure it can claim force majeure under than contract.

For more information, see Practice Note: Discharge by force majeure.

Frustration

The doctrine of frustration is not often invoked as commercial contracts usually include a force majeure clause. Under the doctrine, a contract will terminate if an unforeseen event occurs which renders the contractual obligations impossible or radically changes the purpose of entering into the contract. For further information, see Practice Note: Discharge by frustration.

Frustrating events can include destruction of the subject matter of the contract, incapacity or death, supervening illegality or delay which is such that it affects the intended purpose of the contract. A court considers a number of factors in assessing whether a contract is frustrated. These include ‘the terms of the contract itself, its matrix or context, the parties knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract’ (The Sea Angel.

For further information, see Practice Note: Discharge by frustration.

Summary

The owner may have the following options against the supplier of the components:

• where time for performance is of the essence of the contract, accept the supplier’s repudiation of the contract and seek damages for breach of contract. Damages may not cover any corresponding damages payable by the owner under its contract with the customer

• terminate the contract with the supplier under contractual termination rights and seek damages for breach of contract

• if there is a force majeure clause that covers the delay, the performance can be suspended by the supplier triggering the force majeure clause. The owner will need to make sure that it triggers any corresponding force majeure clause in its contract with the customer (if applicable)

• if there is no force majeure clause to cover the delay, is the supplier able to guarantee supply at a later date and can the owner get the customer to agree to a later delivery date for supply of the owner’s products? If so, all agreements can be amended to reflect the revised dates. Note that contractual variation provisions should be complied with, see Practice Note: Contract variation

• where it is not known when delivery of the components will take place, consider finding an alternative supplier of the components to maintain the relationship with the customer

• the customer should be notified of the delay

Related Articles:
Latest Articles: