Coronavirus

Customer contracts in a crisis

We lawyers have been asked a lot of questions about contracts in the past couple of weeks. At this point, I probably don’t need to tell you why.

Most of the questions have been along similar lines – “can I get out of this contract?” and “how much will I risk having to pay if I do?”. 

These questions take on additional nuance when you’re dealing with consumers, especially those who really depend on you for goods or services. Customers, their families and friends will remember how your business treats them during this challenging period and a heavy-handed legal approach to cancelling orders and bookings could irretrievably damage a brand. 

That said, the brand question is moot if a retailer is forced into liquidation because of insufficient cash coming into the business as a result of the coronavirus crisis. You need look no further than Debenhams and Cath Kidston to see the widespread impact on the financial position of some well-known household brands, indicating no business is safe at the moment. 

There’s clearly a balance needed between keeping your head above water and protecting the long-term position of your brand. With that in mind, Foot Anstey recently ran a webinar to try and work our way through some of these issues that consumer-facing businesses are currently dealing with. 

We used several example questions from the events and leisure industry to guide our discussion, but the points apply to all consumer-facing businesses in some shape or form. I’ve drawn out a few key ones below.

Exceptional times may mean exceptional measures… or not.

Let’s start with the legal position. The coronavirus pandemic and the response to it are unlike anything we’ve faced in our lives. However, there is still no automatic right to exit or suspend a contract in English law. Customer orders are often governed by standard terms and conditions rather than a bespoke contract, but the same principle applies. 

To cancel an order or delivery, you have to look at the specifics of your contract and see what it allows for. On this point, we’ve observed some suppliers talking about ‘Force Majeure’, as if it were a panacea that will let them exit all contracts with customers. This is a mistake – there is no universal definition of Force Majeure. It’s effectively a shorthand term for any contractual clause which deals with unforeseen circumstances or disasters. 

You may think that coronavirus is both an unforeseen circumstance and a disaster, but does your contract agree? If pandemics or government action are specifically mentioned then you might be in luck, but if the contract is silent then you have to think very carefully about the risk you’re willing to accept if you seek to rely on the principle of force majeure to evade contractual responsibilities.

A cause for frustration.

If an existing force majeure clause isn’t an option, then your next recourse might be frustration, a tricky legal doctrine to understand, but one which at its heart says a party can leave a contract if circumstances make it completely impossible to fulfil. 

Google frustration and you’ll find lots of lawyers discussing it with vague references to Latin poetry. You’ll also perhaps read how difficult it can be to prove in court – indeed the European Medicines Agency recently lost a case where it tried to use frustration to exit a lease on its Canary Wharf offices, arguing Brexit meant an EU agency could no longer operate out of London. The High Court disagreed.

In short, exiting contracts swiftly can be a risky affair – and bring with it the risk of claims, especially if you do it across your customer base. The key, we think, is to take an open and frank approach with your customers, with one eye on the legal position if you need to fall back on it. 

Honest and early dialogue – with a human touch.

 

Rather than simply cancelling contracts, an open and honest discussion with customers may reveal that they are happy to defer the delivery of goods and services to a later date, especially if you incentivise this with added perks such as a complimentary upgrade or a voucher for future use. Alternatively, they may still wish to cancel and get a refund now, but be happy for you to contact them to renew their purchase once normal service resumes. 

In our webinar I used the example of membership schemes. Organisations ranging from the National Trust to gyms to wine merchants run subscription schemes that provide goods and services or open their venues to customers, but during lockdown they may not be able to provide those services, or their customers may not be able to enjoy using their facilities, as usual. Offering to defer membership benefits until after the crisis, perhaps throwing in some additional benefits they can enjoy at home for good measure in the meantime (such as archived material, interviews or virtual tours), will help to maintain customer loyalty.

Being understanding about cancellations where possible may also make subscribers more receptive to membership renewal marketing when things return to normal- which brings me to my last point.

There will be life after lockdown.

Companies which take a human approach with customers will be remembered for being understanding and accommodating during such unusual circumstances. Those that take a heavy-handed legalistic approach will be remembered as being merciless and uncompromising. 

This may sound like an odd thing for a lawyer to say, but winning a legal argument that loses you business in the long run is a Pyrrhic victory. 

You need to take a commercial view of which relationships you can afford to lose a little on now for future brand benefit, versus those orders and contracts where you really can’t afford the cash to leave the business. 


Alexandra Hammond, managing associate, Foot Anstey

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