COVID-19: When can businesses rely on change in law provisions?

This article considers the impact of government COVID-19 measures as a change in law governing contracts and what steps companies seeking to rely on the change in law provisions within their contract will have to take when dealing with the impact of COVID-19. 

7 July 2020

As COVID-19 restrictions are gradually being relaxed, businesses are having to adapt for a return to work in the ‘new normal’. Businesses will be concerned as to whether they can be relieved of performing their contractual duties and, importantly, whether they can pass on or recover some of the cost of complying with a suite of government measures to combat COVID-19. Two of the key provisions here are force majeure and change in law. 

For general information on relying on force majeure to delay performance of a contract as a result of COVID-19, see the helpful guidance published by our trade and commerce team.

Change in law: what is it?

A change in law clause will typically provide the terms on which the party supplying goods or services under a contract (or in some cases, both parties) can recover the increased cost in contract performance due to a change in the law. This is quite distinct from any force majeure, particularly as we emerge from lockdown, as parties relying on change in law clauses may be entitled to financial relief from an increase in costs caused by changes to the law affecting their contracts, as opposed to only being excused from performance of contractual obligations.

How is change in law defined in your contract?

The first step in determining whether a change in law provision in your contract applies is to consider what constitutes a change in law. There is no generally accepted definition of what this is; it will turn on how the term is defined in each contract. 
The starting point for most contracts will be to consider what specific laws are caught. A contract may restrict this to laws that are set at UK level, EU level, or perhaps, more narrowly, only at a devolved level. 

It will also be necessary to consider whether only primary legislation of government (in the form of acts or regulations) is caught. Contracts will vary on the extent to which secondary legislation and other instruments such as guidelines, industry codes and regulatory or government policies are within scope. 

A particular issue in relation to COVID-19 is whether the contract includes government guidance within the definition of a change in law. A considerable number of the UK’s and devolved governments’ publications in response to COVID-19 has been guidance rather than primary or secondary legislation. Parties should review the relevant government publication closely to determine what authority or legal standing it has and how this ties in with the change in law clause in their particular contract. 

Does the change in law qualify for relief?

Not all changes in law will qualify for relief or an ability to recover costs. Again, the terms of the applicable contract must be closely considered as other conditions may apply.  

Foreseeable changes in law, relating to normal or predictable changes that affect all businesses, often do not qualify for relief under a contract. Parties are typically expected to live with such changes in the normal course of business.

In addition, general changes in law, which affect all businesses operating within a similar sector, market or industry, are commonly distinguished from specific changes in law, which cover changes that have a significant effect on the costs incurred by the party to the contract when compared with all other businesses in the same sector or market. While general changes in law will not usually give rise to relief or an ability to recover costs (because the supplier or affected party would likely be required to comply with such changes notwithstanding the fact the contract has been entered into) specific changes in law do usually give rise to such rights to recover costs, given that those costs would not have been incurred but for the supplier or affected party entering into the contract.

Businesses should also be mindful of any specific approaches taken within a certain sector or industry that seek to combat the economic impact of COVID-19. Parties engaged in public sector contracts are being encouraged, where possible, to explore alternative measures that continue to support the relevant supply chain and promote economic stability, rather than seeking contractual relief. Our infrastructure and construction teams are currently discussing with clients a wide variety of solutions, ranging from sharing the impact of future costs to re-profiling payments. 

It is also worth noting that to benefit from change in law provisions in a contract there must be a causal link between the change in law and the adverse impact on the relevant party. Generally, a party will only be entitled to financial relief where a change in law directly affects the services or that party’s other obligations under the particular contract.

There are a number of significant considerations when seeking to rely on a change in law clause. Any party wishing to do so should work through each stage of the analysis carefully.

Should you require any support or advice in relation to the issues set out in this article or commercial contracts more generally, please get in touch with Liz McRobb, Alison Rochester or your usual Shepherd and Wedderburn contact.