2020-04-06
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Coronavirus: Agricultural supply chains

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Posted by Joel Woolf on 02 April 2020

Joel Woolf - Agriculture and Farming Lawyer
Joel Woolf Partner

For many farmers their supply chain is the least of their worries.  The biggest worry for many is a labour shortage because of border closures thus preventing many of the foreign workers, on which the industry relies, getting to the UK.  The farmer has a market – getting the product to it is the challenge.

However, some are seeing disruption to the supply chain above them.  This is particularly the case, as an example, for beef farmers supplying McDonald’s restaurants, or dairy farmers who supply a dairy processor that predominantly supplies milk to cafés, pubs and restaurants.

With the leisure sector effectively shut down, the bottom has effectively fallen out of the processor’s market. As a result, some are starting to pass that problem back down the chain telling the farmer that it is their problem.  But is it?

Here are some questions with some potential answers:

Q) My processor says they are no longer able to pick up my milk. Can they rely on Covid-19 outbreak to do that?

A) From an English law perspective, the starting principle is that contractual obligations are absolute, meaning parties are required to perform their obligations and can be liable for breach if they fail to do so. There are, however, three key exceptions to this rule:

 

  1. Force Majeure Clause: Some contracts include a ‘force majeure’ clause which excuses the performance of obligations under the contract if an event happens which is beyond the parties’ contemplation or control.
  2. Material Adverse Change Clause: Some contracts include this clause which may, depending on the wording and interpretation, entitle a party to avoid its performance obligations.
  3. Frustration: Where there is no force majeure clause, the law provides potential relief in the form of ‘frustration’. This discharges a party from its obligations if there is a change in circumstances which makes it physically or commercially impossible to perform the contract or would render performance radically different. This is a high bar and of narrow application. Whether this applied would need to be considered on a case-by-case basis.

 

Whether your buyer can use any of the above to stop collecting milk will be a matter of construction of the clauses.  However, if the reason is simply because it has no market for the milk it collects then that is probably a different matter.

Q) Is Covid-19 covered by the force majeure clause in my contract?

A) Force majeure clauses differ so there are various factors to consider on a case-by-case basis, such as:

  • Is Coronavirus covered by the clause?
  • If so, are there elements of conditionality associated with the clause applying and are they present?
  • What notice requirements apply? You will need to comply with these to the extent that you wish to rely on the clause.
  • What is the effect of establishing force majeure?
    • Is it an extension of time?
    • Is it a termination right immediately or after a period of time?
    • Who bears the costs?

It is advisable to seek legal advice on the interpretation of your force majeure clause, and anything your processor has told you, before taking any action so that you can fully understand the potential risks and the commercial and financial impact on your business.  For instance, if your processor cannot sell the milk it collects and has to absorb the cost of disposal, its long-term survival may be in doubt so you may end up with nowhere to sell your milk just when the spring flush is coming through. 

There will be circumstances in which the coronavirus excuses a party from performing their obligations; however, this will largely depend upon the wording of the contract.

It is important to review your contract terms, particularly any force majeure or material adverse changes clause, to establish each party’s rights under the contract.  Seek legal advice on their interpretation and the commercial and legal consequences that may follow and consider whether you need to inform your insurers.  It is important that you are clear on your legal position before engaging with the other party.

Q) My processor is asking to change its contractual obligations because of the impact of Covid-19. Should I agree?

A) This is a commercial question for you but, when communicating about the potential impact of the coronavirus on your respective performance obligations, make sure that you:

  • Are clear and fully informed of your legal obligations and rights under the contract;
  • Do not inadvertently agree a waiver or variation of the terms of the contract;
  • Put everything in writing, clarifying the intended scope and legal consequences; and
  • Expressly reject, in writing, any proposed variations to which you do not agree.

Seeking legal advice on the content of your communications before sending them is sensible to ensure that your intentions are clear and can be later relied on if necessary.

Q) I am concerned that, due to staffing shortages, I will not be able to fulfil my obligations under the contract. What should I do?

A) Carefully review the terms of your contract to see whether there are any clauses which can be relied on to absolve you from performance or protect you against potential breach.  Where problems with performance are anticipated, it is wise to negotiate a variation to the contract quickly, and before the default occurs, to avoid being in breach with its accompanying financial and reputational consequences.

Q) Am I covered under my business insurance for losses related to the Covid-19 outbreak?

A) Cover will depend entirely upon the wording and interpretation of the insurance contract.  Disputes often arise over the scope of definitions, interpretation of clauses, whether or not events were ‘pre-existing’ prior to inception of the policy, what exclusions have been placed on cover, what loss is covered, and when the outbreak became a notifiable event and whether notice periods have been complied with.

All businesses are now operating in uncharted waters. The government is reviewing its support for business on an almost daily basis. At the moment, the best advice is to keep a clear head, do not act precipitately, and take advice before deciding on the best course of action. It is quite clear that no one can predict with any certainty how the economy will fare after the immediate health crisis has passed. However, what is clear is that everyone is facing similar issues. By keeping your professional advisers in your decision-making loop, you will be able to take advantage of the experience of others who are dealing with the same challenges. As ever, our agriculture team is at the end of the phone, so do please contact us if we can help in any way.

Tags: Agriculture

About the author

Joel Woolf

Partner

Joel specialises in strategic advice to rural business clients.

Joel Woolf

Joel specialises in strategic advice to rural business clients.

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