Effect of COVID-19 on Commercial Contracts
The outbreak of COVID-19 is widespread with implications for multiple sectors of the global economy. Many businesses are confronted with serious commercial consequences, such as delays in delivery of goods and services, and may look for ways to mitigate the impact on contractual performance. Disruption caused to businesses in the supply chain sector caused by thisyu pandemic is likely to cause delays, interruption and even cancellation. In cases like this, Counterparties (especially suppliers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts.Businesses are faced with the difficult legal questions involving Force Majeure and related provisions in their contracts and in the applicable statutes covering their particular jurisdictions.
Given the above disruptions, it’s important that businesses potentially affected identify the laws governing their agreements to assess how it may impact their contractual relationships and how the force majeure clauses in them will be interpreted. Whilst common law relies mainly on case law rather than statute, thereby making parties agreement even more important, some civil law jurisdictions have detailed statutory rules on force majeure. Apart from force majeur provisons in contracts or other relevant statutes, a number of other legal concepts can be relevant, depending on applicable law, to situations where performance of contractual obligations is affected by COVID-19. It is only when parties to a contract know their rights and obligations that they can manage risks appropriately and navigate their relationships with suppliers and customers so as to avoid a dispute. The following are a few practical steps businesses can look out for while assessing their contractual agreements at this time;
- Consider what rights you have and what you need to do to protect them. For example, be aware of notice requirements which are preconditions to exercising a force majeure clause or insurance protection;
- Consider whether and how to communicate with counterparties pre-emptively to seek solutions to potential problem areas.
- Consider if your performance as of contractual obligations may be affected and take reasonable steps to work around the identified risks or discuss them with your counterparty. Where you can perform some but not all of your contracts, think carefully about which contracts you prioritise, bearing in mind applicable laws and relevant contractual provisions;
- in a supply chain context, identify whether you are dealing with different laws applying to different points of the chain and what that means in relation to the overall performance of the contract. If your supply chain is exposed to the effects of the outbreak, then lining up fall-back options becomes necessary;
- Consider whether your insurance policies cover the outbreak or its knock-on effects;
- consider the longer-term relationship with your counterparties, and whether force majeure, frustration or the other principles discussed below might be used as leverage to negotiate a sensible commercial solution to current issues;
- consider other commercial and reputational risks that may arise from the outbreak, including HR/employment issues and the risk of counterparties becoming insolvent.
How can COVID-19 affect my contract?
Contracts may be affected by the legal and economic consequences of the outbreak, amid supply chain disruption, travel restrictions and turmoil across different markets. The first step is to review existing contracts and those being negotiated (including standard terms of business).
In current contracts, parties may struggle to perform them properly or to get out of them altogether. Whether a counterparty is excused from its contractual obligations or could seek to terminate a contract will depend on the terms of each contract and the relevant factual circumstances.
In contracts being drafted at the moment, you may wish to include additional commercial terms to try to protect yourself against the effects of the outbreak. For example, pricing adjustment clauses for contracts relying on tariffs or affected by exchange rate fluctuations.
Can I or my counterparty terminate an existing contract because of COVID-19?
This will depend on the drafting and the particular facts. Two potential options open to a party include:
- Force majeure clauses: these clauses relieve a party from the consequences of a failure to comply with an obligation where that failure is due to the occurrence of an event outside its control and may allow for termination of the contract without liability. The clause should be analysed to see whether the COVID-19 outbreak falls within its scope and the impact of the outbreak on the contract. Is there specific reference to an epidemic, pandemic or contagious disease? (The World Health Organisation’s declaration of the coronavirus outbreak as a ‘Public Health Emergency of International Concern’ may be relevant.
- Frustration: This can be relied on if something occurs after contract formation, which is not due to either party’s fault, that makes it physically or commercially impossible to fulfill, or renders a party’s obligation radically different from that undertaken when the contract was entered into. The doctrine is narrow and will not be available;
- if the contract provides, expressly or impliedly, for the risk of supervening events that have occurred;
- simply because a contract has become less economically lucrative; or
- if the circumstances were foreseeable.
Whether a party can invoke frustration as a result of the outbreak will turn on the length and intensity of the disruption, and whether this can be overcome with time or not. For example, a contract for the supply of goods may be frustrated if travel restrictions have made it impossible for the supplier to deliver the goods by a certain date where time is of the essence.
What other contractual points should I consider in my commercial contracts?
- Currency fluctuations:currency values may affect pricing so in new contracts consider how to allocate future risk such as through flexible pricing or hardship clauses.
- Commercial terms:these may need to be renegotiated to reflect customs and excise procedures and tariffs, supply chain impacts or restrictions on movement of people. Consider whether the underlying economics of the contract may have changed as a result of the outbreak.
- Representations, warranties and undertakings:should these continue to be given? For example, representations that there is no default under a material contract, or no material contract which cannot be performed. For contracts being negotiated, consider limitations on liability or disclosures. For existing contracts, waivers may be required.
- Remedies:will damages be an effective remedy? Would specific performance be more attractive or an obligation to negotiate in good faith or a variation procedure?
- Business Day definitions:where a definition of ‘Business Day’ refers to a day “on which banks are open for general business”, consider the implications of bank closures, as seen in China and now Nigeria, and consequent impact on completion dates and funding dates for financings.
Business owners should understand that beyond pure contractual analysis, other more practical steps that businesses can take includes keeping track of the facts as they unfold as this will help in establishing a claim, consider insurance coverage and confirm whether they require notifications to be made. Also to be considered is whether any preventive measures can be taken and whether negotiated solutions are possible. Finally, its important that business owners in addition to all of the above, consider obtaining specialist legal advise to analyse and preserve their contractual positions as much as possible.
If you have doubts about the provisions off your contract due to COVID-19, you can send 618 Bees an email so we can help review, we can assist clients by quickly identifying and extracting key contractual provisions, including force majeure, MAC (Material Adverse Change), and change in law. If you would like to discuss the contract review options available, please speak to us via 09017190079 or email firstname.lastname@example.org.
Team 618 Bees
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