COVID 19: Advice on contracts
As the COVID-19 pandemic maintains its hold of the global economy, it’s vital for a business to understand its position in connection with any agreements to which it is a party and the options available in any necessary negotiations with suppliers, customers and other third parties.
We predict a widespread renegotiation and/or relaxation of commercial terms between businesses, as the norms of contract breach and remedy are – temporarily at least – replaced with a new pragmatic reality.
However, our advice is to conduct a review of material contracts from a legal and commercial perspective as a precursor to entering into renegotiations.
Key legal provisions
Force Majeure clauses – when an extraordinary event or circumstance beyond the parties’ control prevents one or all of them from fulfilling those obligations a party may have a right to suspend or, in some instances, terminate a contract.
Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clauses – commonly appearing in sale & purchase, financing and other commercial agreements, and used to identify grounds on which a party may terminate a transaction because of an event that has a negative impact and is detrimental to one party.
Frustration – in the absence of any force majeure, MAC or MAE clauses, a party may seek to rely on the common law doctrine of frustration and to claim that the outbreak of COVID-19 is a “supervening event”, which has the effect of terminating the contract and releases both parties from their respective obligations under it.
5 key steps for business owners
- Review your material contracts that could be affected by the shutdown – whether as a result of disruption in supply chains or a potential inability of the business to perform its obligations.
- Assess risks and commercial impact of any default or potential breach of contract.
- Consider options and what obligations and protections the business has under the contract or elsewhere (including insurance).
- Exercise rights available under the contract in respect of events outside of your control.
- Enter into a dialogue with the affected contracting parties at any early stage before it is too late and seek to find an alternative means of performance or look to renegotiate terms to ward off any dispute.