The response to COVID-19 of quarantining and social isolation has begun to impact virtually every aspect of global commerce – and it has not taken that long! Fast-changing business environments have brought a number of new challenges to virtually all business owners and managers. They may include a newly observed lack of integrity amongst partners, unaccustomed challenges with customer acquisition and retention, not to mention the most obvious and unprecedented supply chain interruptions all are seeing. Uncertainty has a lot of business owners reacting in a panic to the situation their operations are facing rather than more calmly analyzing, strategizing and acting for the longer term. And make no mistake about it: This global situation will not resolve back to ‘business as usual’ within just a week or a month. The ramifications will be long term.
There are a few strategic things that business owners can do right now in a calm response to this situation. One of them is to identify and assess the risks and develop a clear plan of mitigation related to the existing contracts. ‘Mitigation’ in law means that a party who has suffered a loss takes steps to reduce the loss – to minimize the losses incurred.
The best way to start this mitigation process is to review all the existing contracts your business has entered into. It is time to assess the parties’ legal rights and obligations by taking these four steps:
1.) assessing contractual provisions that have been or may be affected as events unfold.
2.) identifying and abiding by any relevant notice requirements: A ‘notice clause’ of a contract defines how the parties will communicate with each other in written form; following the directives makes sure the other party won’t claim you did not communicate.
3.) analyzing the risks and consequences of a default or breach under the agreement, and
4.) determining alternative (‘work-around’) means of performance under the contract, or proactively (re)negotiating where possible.
Such a thorough contract analysis will make it clearer if you have an opportunity to be excused from the performance of the contract. Will performance be possible – but tardy or partial for a period of time? Is performance impossible in all foreseeable cases?
Events seen to block execution of a contractual obligation might include ‘frustration of purpose’ or ‘commercial impracticability’. In civil law jurisdictions, doctrines like ‘hardship’ and ‘changed circumstances’ may be invoked.
While reviewing agreements, business owners should keep in mind that a party may be excused from performing under ‘force majeure’ doctrine and other legal doctrines dependent on the governing law of the contract.
In every business transaction, extreme events commonly referred to as ‘force majeure events’ – those beyond the control of the obligor – may arise to prevent the impacted party from performing the contract. The general rule is that a force majeure clause must include the event in question in order to excuse performance or, in some cases, merely suspend performance.
However, some force majeure provisions include a reference to an ‘action’ or ‘order’ from the government, while another group of force majeure clauses are highly generalized and only refer to “any Act of God or other circumstance beyond the control of the parties.” Still, other clauses list specific examples (“fires, floods, earthquakes, tsunamis, wars, terrorist attacks, strikes, civil unrest…”) but then conclude with a catch-all phrase such as “or any other circumstance beyond the control of the parties which they cannot overcome through reasonable and diligent efforts.”
Therefore, while analyzing the agreement, the business owner has to find out if the language of the provision captures COVID-19-related disruptions and if so, whether performance is excused, suspended or call for further evaluation.
Most force majeure clauses require the side seeking to avoid performance to give notice or otherwise inform its counterparty that it will not be able to satisfy its obligations under the contract. NOTE: Please strategize and act rather than react without preparation. Companies should resist the urge to issue a rote or terse notice. They should instead layout in some detail exactly why they cannot perform and why they have not been able to find some way over, around or through the problem. Write it all up and submit it to the other party. Then, if the other side should sue over the contract, that force majeure notice you have carefully thought through and wisely drafted becomes a crucial piece of evidence that the court will closely scrutinize. Telling a convincing and thorough story upfront will go a long way in any eventual dispute.
If COVID-19 clearly doesn’t qualify as force majeure because of some combination of your specific situation, the words of the contract, and relevant law, that is not the end of the line. Performance by one or both sides may still be excused under other legal doctrines like ‘frustration of purpose’. And for contracts that are governed by the laws of a civil law jurisdiction, other doctrines like ‘hardship’ or ‘changed circumstances’ may apply.
Analyzing the contract is about doing a strategic analysis that helps businesses understand the scope of risks related to the termination or nonperformance of the agreement by other parties. Getting clear on the nonperformance risks of the other party helps business owners be proactive about initiating the mutual renegotiation or termination of these agreements.
It is important to note that while analyzing the contract governing business operations, it is not just about trying to get out the contractual obligations that are not beneficial to the business specifically in these weeks of global quarantining and distancing. It is about planning for the future, maintaining good relationships and protecting the business in all its interactions.