COVID-19: Have you thought of reviewing your contracts?
15 June 2020
MS PATRICIA CHAMOUN
LEGAL AND BUSINESS ADVICE
As business are slowly re-opening and COVID-19 cases are seemingly decreasing, the aftershock of the epidemic is far from over. If there is anything we have learnt from the present state of affairs, it is that in business, we must always be prepared for the unexpected. Following these unforeseen and unprecedented levels of disruption in our society and to our economy, now is the time to reflect on how we, as businessmen and women, could have been more legally prepared. As Benjamin Franklin once said: “By failing to prepare, you are preparing to fail”.
The main issues businesses are facing at this time include notably labour issues (i.e. layoffs, work reductions, salary cutbacks), default in performance of obligations and inability to operate due to government-imposed restrictions. Solutions to these issues include thorough review and drafting of legal documentation.
The two avenues we will explore are how to review existing contracts and entering into new agreements in a post COVID-19 era.
Reviewing Existing Contracts
First and foremost, one should review any pertinent existing contract they are a party to. It is recommended to create an inventory of all current undertakings to determine which will be impacted by the epidemic and to what extent. It is important to focus on key provisions, mainly the following Clauses:
- Force majeure Clauses. Read carefully to determine if the epidemic constitutes a superior force releasing parties from their obligations. COVID-19 can be considered a superior force depending on express wording and surrounding clauses. However, take note that if it does qualify and mitigation action is not taken, one may be precluded from relying on this type of clause. Additionally, certain obligations may be excluded from the application of a force majeure clause, (i.e. payment clauses). This brings forth the importance of thoroughly reading the contract in its entirety, to obtain a full picture.
- Payment Clauses. (Including but not limited to deposits, retainers, administration fees)
- Events of Default and Penalty Clauses.
- Suspension and Termination Clauses.
- Indemnification and Limitation on Liability Clauses.
- Dispute Resolution Clauses.
- Notice Provision Clauses.
Once one has established provisions in contracts that may be of relevance, it is important to assess risks of not meeting contractual obligations in a timely manner and consider remedies in the event of a non-performance. Keep counterparties informed at all times of your current situation and communicate to reach a common solution. Parties always have an obligation to mitigate risk and damages. For example: verify if governmental measures (i.e. Work-Sharing Program) exist as tools to mitigate risk. Be sure to keep detailed records and accounts of your mitigation efforts to be able to prove good faith.
Ultimately, the ideal solution calls for an amendment to your contracts, to account for concerns regarding COVID-19. It is preferable to amend contractual agreements than to breach and be involved in litigious matters. If a party is unlikely to meet its contractual obligations, it is wise to give advance notice of the problem so that parties may negotiate this contractual amendment. However, do be advised that this option is subject to consent by both parties, which depending on the relationship, may be difficult to obtain.
Entering into New Agreements
Upon entering into a new agreement, and contingent upon a second wave, “force majeure” clauses, extensions of time or other clauses may be inapplicable due to foreseeability. It can be proven that both parties were aware of the situation before entering into a contract, making it reasonably foreseeable. The court may find that the risks of COVID-19 have been factored into the bargain and that these clauses should no longer apply. This is why, moving forward, it is important to clearly define particular situations through the agency of specific and detailed clauses, to avoid relying on general clauses.
The following categories of Clauses are some examples that can be included in a New Agreement or a Contractual Amendment moving forward:
- Force majeure Clauses. Consider the type of events that will be deemed a force majeure event and avoid ambiguity.
- Health and Safety Requirement Clauses. Provide for health and safety requirements and measures that will be put into place to protect parties, particularly in contracts involving healthcare workers.
- Progress Performance Clauses. This can include structures or milestones to monitor performance throughout the course of the relationship.
- Pricing and Payment Clauses. Include time limits for payments, payment suspensions, and penalties for late payment. For example, businesses that rely on prepaid service contracts may need to hold payments in a trust/escrow account to be able to refund clients promptly. Other examples include a “COVID Tax” which provides for a price increase due to additional measures and efforts being put into place.
- Re-Negotiation Clauses. For example, Government orders can trigger an update to the contract for a fixed period of time. However, be sure to specify and avoid open-endedness. Leaving too much room for re-negotiation may permit parties to stray too far from the original agreement.
- Hardship Clauses. This is beneficial when there is excessive burden placed on one of the parties due to unforeseen events. A hardship clause could, depending on the circumstances, entitle you to re-negotiate the amount of your contractual payments.
Terms and Renewal Clauses. Parties can determine a shorter renewal period and notice to renew as financial situations are rapidly changing.
- Events of Default Clauses. Determine the criterion/threshold characterizing a default. For example, is it “impossibility to perform” or will parties be held to a lesser standard? Be specific about what constitutes events of default to prevent a tribunal from having to interpret the contract at a later date.
- Temporary suspension Clauses. Define the duration of the suspension. Parties may consider defining an expiration period to terminate the contract in the event of a prolonged suspension period. This gives parties protection from unilateral termination for a certain period of time.
- Termination Clauses. Determine the notice period prior to termination. Relevant for both suppliers and customers who may need to terminate projects as a result of circumstances or changing business priorities.
- Mitigation Clauses. Determine the extent to which parties will be expected to mitigate damages and assume costs and expenses.
- Dispute resolution Clauses. In the event of dispute, consider internal dispute, mediation, or arbitration clauses to avoid potential litigation.
- Liquidated damages Clauses. Determine a pre-estimate of damages in the event of a breach, to avoid leaving the court to decide in a potential litigation.
To conclude, spending more time, energy, and resources now to review and draft proper legal documentation, will reduce time and money spent resolving potential disputes for the future. If you require any additional information or wish to implement some of the information provided, we are eager and available to assist you.