Have you COVID-PROOFED your contracts? 

During this unprecedented period of financial uncertainty on many business fronts, one of the questions we have been getting from our clients is how to ensure that their contracts are more resilient to fluctuations in demand, supply, receivables and cost.

Business owners are now going back to their contracts to examine weaknesses, empty promises, and technicalities which they would not normally have given more than a glance at.  In addition to the reliefs under the COVID-19 (Temporary Measures) Act, many businesses have to review if they are obligated to perform under their contracts, or whether they can invoke a force majeure and other clauses to excuse performance temporarily — or even permanently.

Among the many lessons learnt, one of the most important is this: preparation is key, and with a sound strategy and strong technology, contracts can be better future-proofed (or at least prepared) for various business environments, including a pandemic.

Important terms to consider

First and foremost would be the clause which most businesses will be looking that business closures, stay-home notices, pandemics and inability to perform can have an impact on contracts, that being the force majeure clause.

It excuses a party’s non-performance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations. Here’s a sample force majeure clause:

“Neither party is responsible for any failure to perform its obligations under this contract, if it is prevented or delayed in performing those obligations by an event of force majeure.”

Contract language is the most important factor in interpreting such clauses, and contracting parties should carefully consider how they draft such provisions to allocate risk appropriately.

Force majeure challenge 1: Clarity is key.

Recent events, including the declaration of COVID-19 (or any new or novel form of disease) pandemic, along with subsequent bans on gatherings and restrictions on movement have altered the force majeure landscape in a manner that may impact the availability of such provisions to non-performing parties. The most clear-cut situations would be those where the force majeure clause specifically references “infectious disease” (which the example above does not) and eliminates any requirement that the event be wholly natural, as opposed to political (eg, including “acts of government” along with “acts of God”).

Force majeure challenge 2: Then what? 

Another major consideration when drafting such clauses is the appropriate relief or remedy. Will the force majeure event render the contract:

  • null and void? Or only
  • temporarily suspend performance?

Again, since contract language is paramount in these instances, the contract drafter must be abundantly clear. For example, if your business desires the flexibility to terminate the contract completely during a hypothetical second wave of the virus, or a similar pandemic, the document should specify something to the effect of:

“Upon the occurrence of any such force majeure event enumerated [in reference paragraph] then [both parties | only one party] may immediately terminate this Agreement and shall have no further rights, obligations or entitlements under this Agreement.”

Additional clauses

Frustration

Similarly, the doctrine of frustration may apply when the primary reason for entering into a contract becomes impossible due to some event. In the case of COVID-19, one could imagine this doctrine being invoked, in this example:

Someone rents space to watch a certain public event together with ancillary items. Due to event cancellations and bans, they can no longer use the rented space. Thus, the original purpose of the contract has been completely frustrated.  Although the COVID-19 Act may have alleviated some of the impact on the event/tourism related industry, an appropriate frustration clause could allow parties to re-negotiate their respective obligations.

Future-proofing for such a situation and use, means business-owners especially in the relevant industries should carefully detail such intent in the document.

Delivery of notices

Contracts will often provide that notice of a termination event must be delivered to a party by hand, and some even require that notice be personally delivered with a return receipt in order to be effective. In a changing world, and with COVID-19 persisting, such hand delivery may no longer be possible. Most contracts will specify an office address for the delivery of such notices, and many offices are now closed. Moving forward, contract authors should, at minimum, consider using email addresses for alternate delivery of notices.   The Ministry of Law has even progressively detailed that social media platforms which are active, as well as Whatsapp and other mobile means of communication Apps can be used for service of Notifications for Relief.  Future-proofing contracts will do well to take into account these sort of delivery methods.

Business interruption coverage

Apart from contracts, companies should consider whether insurance protection might be available to address certain losses and interruptions resulting from the pandemic. Companies anticipating potential business interruption should review applicable insurance policies and provisions, including business interruption and contingent business interruption insurance.

Based on the impact of COVID-19, companies should proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from COVID-19 would be covered. A review of their policies’ insurer notice requirements should be conducted to ensure their scrupulous compliance with those provisions in the event coverage is needed.

Insurers will likely also be taking proactive measures by reviewing their standard policy language in anticipation of such claims, and preparing themselves for the near-certainty that insurance coverage lawsuits will be filed in connection with uncovered losses.  So as business-owners, you should make sure your conversation with your broker is clear and unequivocal about the kind of coverage required.

Conclusion

Relying on force majeure or similar clauses, or attempting to bring frustration as a reason to exit a contract, is not an easy, nor by any means a guaranteed, ‘get out’ for contracting parties when times get tough.  A better approach may be, at the point of drafting, the types of circumstances in which the parties may require flexibility to renegotiate key terms; may wish to extricate themselves entirely from the arrangements; and/or may wish to avoid or limit liability for any breach or non-performance, and then to cater for those eventualities in the contract.

 

Other commercial issues which the pandemic has highlighted to businesses are the risks of becoming overly dependent on any one source of demand (as in physical retail), or one source for vital supplies, and the delicate balance which should be struck between cost and demand/supply resilience that comes from shoring-up with increased inventory. Self-sufficiency will be a key factor moving into the post-COVID environment. Reviewing your supply network will help businesses to determine the right level of redundancy to build into their stock, so as to offer maximum flexibility and facilitate business continuity in the face of Coronavirus or any other unexpected and significant event. Contracts which tie parties into exclusivity arrangements will need to be carefully considered in this context.

Source:
Mr Edwin Sim
DIRECTOR
LEXTON LAW CORPORATION

 

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