Opinion: Retailers may face further pain from force majeure disputes

Retailers, and businesses throughout their supply chains, are understandably apprehensive about the immediate and mid-term future.

The future of a business, and the economic prospects for its staff and owners, can depend on taking swift steps at an early stage, but the coming weeks will see a substantial number of breach-of-contract and damages claims in the retail sector.

Breach of contract?

If a business cannot perform its obligations, it may be in breach of contract. It could be liable for damages and the other side may be entitled to terminate the contract.

There are two instances in which a defaulting party may be protected from liability for damages for non-performance: ‘force majeure’ events and ‘frustration’.

Does force majeure apply and, if so, what happens?

Many contracts contain so-called ‘force majeure’ clauses, which excuse a business’ non-performance if a specified event (e.g. ‘act of God’, flood, epidemic) prevents – or sometimes hinders – performance. Already, major retailers such as Primark have cancelled orders from factories, invoking force majeure.

“The business typically has to show its performance has been made impossible, rather than simply more difficult or more expensive”

In principle, Covid-19 qualifies as a force majeure event. But force majeure is by no means a silver bullet for retailers.

First, the business typically has to show its performance has been made impossible, rather than simply more difficult or more expensive. For example, it is rare to obtain relief from an obligation to pay money on the basis of force majeure: usually, payment can be made even in crisis situations.

So a business may face a situation where performance is practically or economically difficult – but not impossible. A business must ask whether it can perform the contract in another way, such as by remote working or by sourcing replacement goods or services for its customer from a country that is not affected.

With the UK in lockdown, it may still be technically possible (albeit more difficult) for contracts to be performed. Establishing that the Covid-19 restrictions have sufficiently prevented performance to qualify will be difficult and will depend on the circumstances. 

Second, a force majeure event must usually be the only cause of failure to perform. We have already seen examples of businesses seeking to declare force majeure to avoid obligations they were unable to perform even before the Covid-19 outbreak.

These companies might rightly find themselves unable to use this argument and be forced to comply with their obligations – the balance between the legitimate rights and interests of the parties can be extremely delicate.

What other claims could retail businesses make?

Where no force majeure clause exists, or where there is a clause but it does not cover the event in question, it is possible that companies may claim the Covid-19 outbreak has ‘frustrated’ the agreement.

Frustration can occur when an event happens that is unforeseen and outside the control of the parties, and which makes a party’s contractual obligations impossible to perform or radically different from what was expected.

A successful claim for frustration means the agreement will terminate automatically. Successful claims of this kind are rare, but given the unprecedented nature of the Covid-19 outbreak we can expect to see more parties claiming frustration as the retail industry scrambles to pull all the levers possible to support business continuity.

What about rent payments?

A particular issue for many retail businesses and landlords, at a time when cash flow is reduced, is the payment of rent.

With the first-quarter rent deadline falling this week, we have already seen a number of high-profile brands publicly declare they will be withholding rent payments in order to preserve liquidity.

Unfortunately for retailers, they will struggle to dispute rental payments through force majeure (rarely found in leases) or frustration.

Occasionally, leases provide for a contractual suspension of rent in certain circumstances. Many tenants are now seeking to agree to suspension or reduction of rent for a period. In these unusual circumstances, landlords may seriously consider such proposals, rather than lose good tenants.

Unfortunately, however, we can certainly expect to see a further rise in the number of insolvent retail companies seeking to agree on CVAs with their creditors so as to remain trading. Again, landlords will wish to consider such proposals carefully in order to avoid losing customers.

“Retailers fighting for survival will be using everything in their armoury to keep afloat, including defaulting on contractual obligations”

The UK’s retail industry has been under significant pressure over recent years, having undergone considerable structural change with consumers increasingly shopping online.

The Covid-19 pandemic will likely be the final nail in the coffin for a number of well-known brands, as well as smaller operators with limited cash reserves.

Retailers fighting for survival will be using everything in their armoury to keep afloat, including defaulting on contractual obligations by arguing force majeure or other means.

This is likely to cause a flurry of lengthy – and costly – litigation, and could further extend uncertainty within the industry even after the pandemic crisis has settled.