Practical considerations where contractual rights have been “waived” due to Coronavirus

14th May 2020

The interruption to business activity caused by the Covid-19 pandemic has resulted in businesses considering whether contractual obligations remain binding during and after lockdown^[1].

This article addresses the situation where a contractual obligation is either: (1) not released by a force majeure clause which is triggered by the Covid-19 pandemic and/or the resulting Government-imposed restrictions; or (2) the parties have chosen not to invoke a force majeure clause that it may have had the option to trigger, potentially in order to continue the business relationship but on potentially different terms.

Many businesses will have agreed to vary obligations or waive rights in contracts in light of the Covid-19 pandemic. It is important that you should now consider whether such actions have validly amended the relevant contractual obligations, now that Government restrictions are gradually being relaxed.

What you should do

• Consider what if any variations or waiver of contracts have taken place.
• Review the terms of existing contracts and ensure that prescribed formalities are complied with in either varying or waiving a right under a contract.
• Ensure certainty by specifying exactly what right you have waived. If the right is a continuing one, for instance a continuing right to receive delivery of an item every week, you should specify what period of time the waiver operates for. If you merely intended for delivery of one item to be delayed, you should make this clear in the notice.
• Consider formally reserving your rights to the party in breach in writing if you are concerned that you may have inadvertently waived a right under a contract, including by delaying taking any action in relation to the breach.

Check the terms – variation or waiver?

It is important to stress that the position on what the parties can and cannot validly do is primarily governed by the terms of the individual contract; if you are not certain of the effect of, or your rights in relation to, a particular contract then you should seek advice. If you intend to formally vary a contract you should check the contract for clauses prescribing: (1) whether you are permitted to vary the terms of the contract; and/or (2) what procedure must be followed to vary the relevant contract e.g. must the variation be in writing.

You may not have considered it necessary to formally vary a contract due to Coronavirus and instead may have reached informal agreements to put contractual obligations “on standby” until a more normal business outlook is resumed. Similarly, you may have chosen not to enforce your rights in relation to a failure of performance by the other contracting party and may therefore be taken to have “waived” that right.

Waiver

Any right that exists under a contract can be waived by the party that holds that right. For instance, if a contract provided for delivery of certain items to take place at certain times after the lockdown commenced and in breach of contract the performing party did not deliver those items, the innocent party would have a right to sue for breach of contract. If the innocent party does not take steps at the time to preserve its right to sue for breach of contract but accepted the continuing breaches then it may be taken to have waived its right to do so in future, whether it intended to waive that right or not. This will have been a common occurrence recently as parties applied business common sense and practicality to trading arrangements and allowed performing parties flexibility due to the difficult circumstances.

Other pertinent examples of rights that may be waived include: (1) the right to receive payment at a particular time; and (2) the right to invoke a force majeure clause.

In order to constitute an effective waiver, the statement or conduct must unequivocally indicate an intention to give up, or promise not to, enforce a right. A short period of inaction can constitute an effective waiver, as can allowing the breaching party time to perform[2].

Waiver by estoppel

Waiver by estoppel can act as a defence to a claim for breach of contract by preventing the waiving party from acting inconsistently with its waiver if the other party has relied on the waiver to its detriment. The effect is that the waiving party is ‘estopped’ from relying on the original contractual right.

Where an innocent party has waived its right to take action against a party in breach, the breaching party may seek to argue that the innocent party has waived its right to enforce against similar breaches in future. For instance, the party that breached its delivery obligations due to the lockdown may seek to argue that the innocent party has waived its right to sue for non-delivery of items once the lockdown is over. For this reason, if you are an innocent party that has waived its rights due to the lockdown, you should now achieve certainty by stating in writing to the party in breach exactly what right you have waived.

No Waiver clause

Contracts will often contain a “No Waiver” clause which acts to prevent any inaction in enforcing a term of the contract from constituting a waiver of its right to enforce that obligation. Therefore, if you are in breach and are seeking to rely on an alleged waiver made by an innocent party, you should review the terms of the contract to ensure that no terms restrict you from doing so.

“No Waiver” clauses do not automatically preclude waiver being established – whether such a clause is effective will depend on the specific drafting and the circumstances that give rise to the apparent waiver^[3].  If the clause is poorly drafted or the facts surrounding the breach are exceptional, waiver can still be established. Despite the existence of a “No Waiver” clause, it has been found that due to the period of time between the breach and innocent party decisively acting on that breach, the right to do so was likely to have been waived[4].

No Oral Waiver clause

Similarly, a “No Oral Waiver” clause may specify that that any failure to enforce by a party is only binding if in writing^[5]. It may be that a situation arises where the actions of the party in reliance on a non-compliant oral variation mean that the parties are then estopped from relying on the “No Oral Waiver” clause. Circumstances where this would arise are not defined but it would appear to take unequivocal conduct showing that the oral variation is valid notwithstanding that it does not comply with a prescribed requirement^[6]. Courts may be ready to apply this in order to restrict unscrupulous parties abusing the existence of “No Oral Waiver” clauses to their benefit in the Coronavirus context.

[1] https://www.walkermorris.co.uk/publications/coronavirus-and-contractual-obligations-what-businesses-need-to-know/

[2] State Securities plc v Initial Industry Ltd [2004] All ER (D) 317 (Jan)

[3] Tele2 International Card Company SA and others v Post Office Ltd [2009] All ER (D) 144 (Jan)

[4] Obiter comments made by Flaux J in Automotive Latch Systems Ltd v Honeywell International Inc [2008] EWHC 2171 (Comm)

[5] MWB Business Exchange Ltd v Rock Advertising Ltd [2018] UKSC 24. MWB has been held to apply by analogy to no waiver clauses; GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm)

[6] MWB Business Exchange Ltd v Rock Advertising Ltd [2018] UKSC 24 at [16], citing Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] UKHL 17 at [9] and [51].