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Where does liability for increasing costs stand?
Alinea are receiving queries from clients requesting the right to increase the costs, and change the timeframe within a contract due to the impact of COVID-19.
The change in circumstances imposed by the environmental conditions of Covid-19 has lead to the inclusion of a precedent clause within new agreements and renegotiation of terms to identify which party is liable for the increased costs. It is a long standing principal of English law that each party must be free to advance their own interests within contract negotiations. Suppliers will as a rule seek to exclude their liability for indirect loss. It is also standard practice for suppliers to place a cap on their financial liability.
This experienced across a wide range of industries, from telecoms, to ecommerce, retail and manufacturing.
The party liability will vary from case to case, according to factors that may include:
- Bargaining power – the position of parties within a contractual agreement to exert obligation over one another.
- Forbearance - unprecedented circumstances, which may have, lead to financial difficulties.
- Prevail clause - The inclusion of a clause, which stipulates that the supplier’s contract terms prevail over any terms provided by the buyer, or vice-versa.
- A force majeure clause – whilst cited as a potential factor to consider that will vary from case to case, the coronavirus is not generally considered to be a force majeure clause.
- Course of dealing – when parties have conducted business together over a long period of time there may be evidence of a course of dealing, as a result of which the terms of dealing will generally be considered the terms of the contract. This may enable supplier to argue that their terms should apply, if a buyer wishes to introduce new terms, or vice-versa.
- Performance measures – certain contracts, such as the manufacturing industry will rely heavily on strict production and delivery schedules. Assessing the timeliness of each phase of the transaction may be critical to performance.
- The impact on the supply chain – additional liabilities and an extended timeframe may impact external stakeholders and other parties across the supply chain.
- Insurance – will insurance provisions cover the additional liabilities?
The Unfair Contract Terms Act 1977 (UCTA) applies in a number of circumstances including when a party is contracting on its standard written terms. Section 11 (4) of the UCTA specifically applies where a party is seeking to restrict its liability to a specified sum of money. When assessing if the financial limitation satisfies the requirements of reasonableness test in the UCTA, references must be made to the resources of the party seeking to limit liability and how far that company was able to cover itself by insurance.