COVID-19 has had a significant impact on the brewing and distilling industry. Breweries and distilleries, both small and large, have been affected by the enforced closure of pubs, bars and restaurants and while there may be a partial mitigation due to an increase in retail sales, the current restrictions with regard to social distancing measures has meant that a number of businesses have had to scale back operations and, in some cases, even stop operations altogether.
From a farming perspective, this could obviously have a significant effect on the broader supply chain. Growers have now planted their crops for harvest later in the year. If the utilisation of grain from the 2019 harvest year stalls, this may have significant implications for the 2020 harvest year as existing stocks go unused and storage space is already used up. The movement of grain is essential for the whole supply chain to operate effectively and prevent knock-on effects back at the farm.
Grain Contracts
Generally, most growers will have entered into a written contract with a buyer in relation to the supply and delivery of grain. Contracts will normally set out the agreed quantity, quality and delivery details between the grower and the buyer.
Once the contract is signed, it is generally binding on both parties and, usually, parties will be unwilling to enter into further negotiations to adjust the contract at this stage. Any amendments to the terms should be sought prior to the contract having been signed. While not unheard of, it is unlikely for either party to agree to amend a binding contract just because one of the parties is having a bad year.
However, problems can arise when either party is unable to fulfil the terms of the contract. In this situation, it is essential that both sides fully understand their rights and obligations under the contract.
Force majeure
Due to the current pandemic, there has been significant focus on force majeure clauses within commercial contracts. A force majeure clause generally provides that one or both of the parties to a contract may be excused from performing their obligations under the contract when an event occurs which is outwith the parties' control.
In the UK there is not an established or default definition of force majeure. Therefore, whether such a clause will apply to the coronavirus pandemic will depend upon the wording of the clause in each individual contract. While some clauses might specifically refer to an epidemic or disease, other clauses might be on far more general terms and will have to be considered in the circumstances to decide whether the force majeure clause will apply.
If the force majeure clause can be enforced, the consequences of that will vary depending upon what the contract actually says. It might be that one party is entitled to delay performance of the contract until the force majeure event ceases; or it might be that the contract can be terminated altogether if performance has become impossible.
The doctrine of frustration
Force majeure is a contractual concept and so can only be relied upon if there is an actual clause within the contract. If no such clause is present, it might be possible to rely upon the doctrine of frustration.
Frustration can be used to bring a contract to an end if it can be proved that the contract has become impossible to perform. However, to successfully use the doctrine a high bar must be met and, therefore, it is often considered to have limited use. For example, where financial circumstances have changed due to COVID-19 and a contract is more onerous or expensive to perform as a result, the doctrine would not be applied as contractual performance is still possible despite the increased cost.
Application of force majeure in grain contracts
In terms of grain contracts, it is common for the force majeure clause to focus on delay of delivery. Generally, the party invoking force majeure will be entitled to an extension until eventually, if delivery still can't be made, the contract is brought to an end. NFU Scotland has already highlighted concerns in relation to potential haulage issues due to some hauliers having to furlough workers in response to a drop in demand from non-food businesses, for example, the construction industry. There are concerns that as and when restrictions are eased, this could increase demand on hauliers and potentially coincide with peak harvest time.
Strict adherence to the contract terms
While in "good" years, parties may take a more relaxed approach to the strict terms of the contract, in more difficult years this is often not the case. Generally, the grain will have to meet a certain specification as set out in the contract in terms of quality; for example, screenings, splitting, moisture content among others.
Testing samples on the farm is recommended but it is sample analysis on delivery that will determine contractual quality and price received. Where grain is tested by the buyer and found to be deficient, the grower can usually ask for a re-test and in some cases, they may ask for an independent test to be carried out. It will depend upon what the contract says but if the grain is found to be deficient, it is possible that the buyer can either claim an allowance on the load or it could be turned away if it doesn't meet the contract specification. While in previous years it might have been the case that another load could have been substituted in its place, this may not be what the contract actually provides for and depending upon the buyer's circumstances it might be more convenient for them, to adhere to the terms of the contract. It is common for the contract to be drafted so that each delivery is treated as a separate contract in its own right.
Defaulting on a contract
It is well documented that if a grower defaults on the contract there may be a default charge, to meet the difference in cost between the contract price and the market price for the buyer procuring the grain elsewhere.
In instances where it is the buyer who does not accept delivery of, or fails to collect, the contract quantity then the grower would usually have the option either to:
- sell the goods at market price (if they can), with the original buyer being liable for any resultant loss suffered by the grower; or
- claim damages from the buyer, the maximum sum being the difference between the contract price and the market price on the date of default.
Where it is apparent that either one of the parties under the contract might struggle to meet their obligations, it is worth ensuring that each side is aware of their respective rights and obligations under the contract. Informed discussions held at an early stage might help to ensure a practical solution under the contract or another alternative arrangement suitable to both parties. It is always worth trying to resolve any issues between parties amicably and, to do so, it can be beneficial if parties are aware of their legal position.
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Senior Associate
