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COVID-19: Triage your contracts and plan appropriately

In the response to COVID-19 companies are rightly prioritising the care and protection of their employees, customers and society at large. The pandemic is already affecting businesses, supply chains and contractual arrangements, and will only continue to do so over the coming weeks and months. In this article, we discuss how to plan effectively in these fast-changing and uncertain times to minimise the long term impact on your business. 

Here are five essential steps that businesses should take to prepare themselves and mitigate losses:

1. Triage your contracts.

Generally, contracts will fall into three broad categories: those that are unaffected and can be performed seamlessly; those that are affected but only to an extent that can be addressed by the business internally and through dialogue with counterparties; and, those that are affected so significantly that the business is likely to require external expertise and advice. It’s essential to identify the contracts that are most critical to operations, and those that are likely to be the most problematic.

2. Assess your contractual options.

Many contracts will include common provisions that could be invoked as a result of COVID-19, although this isn’t necessarily a straightforward process.

The key provisions are:

Force majeure

 Hundreds of businesses at the original epicentre of the outbreak in China have already invoked force majeure (mainly under local laws), allowing them to suspend or terminate performance of a contract in the event of circumstances that are beyond their control. Under English law, however, you may need to check the position more carefully. While force majeure is a relatively common contractual provision, the drafting can vary widely and a pandemic won’t necessarily be listed as a specific event, meaning the general wording would need to cover these circumstances. These provisions can also specify that the event should not be reasonably foreseeable, which could be a point of discussion for COVID-19 given the SARS outbreak of 2003. Some parties may only be able to fall back on such a clause if there are specific legal and statutory changes made. In any case, force majeure clauses may not be the ‘silver bullet’ businesses are looking for, and contracts should be reviewed to ensure the drafting allows for use in these circumstances.

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Step-in rights

Some contracts specify ‘step-in rights’, allowing a business to find alternative suppliers (or step in themselves) in specified circumstances. A business claiming step-in rights would need to establish whether COVID-19 allows it to exercise this right, and whether compensation could be claimed from the original supplier in order to pay for the alternative.

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Material adverse change clauses

Some contracts will contain ‘material adverse change’ (“MAC”) clauses, which provide that where an unforeseeable event materially alters the position of the parties under the contract, this can be treated as an event of default. If the contract contains such a clause, the parties may be able to claim contractual remedies in the normal way for an event of default under the contract. This can include the right to terminate.

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Non-exclusivity clauses

This allows a business to seek supplies from elsewhere without having to compensate the original supplier. However not all provisions are explicit.

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Termination rights

The key question with termination rights is whether non-delivery (or a significant rise in prices due to a shortage of supply) amounts to a material breach of the contract which would allow the innocent party to terminate the contract and claim compensation.

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Whether your business is in a position to claim under any of these provisions, or could face claims from others, it’s important to assess the legal position now as well as the options for renegotiation.

3. Assess your rights (or liabilities) terms of compensation. Some contractual options specify the rights to claim compensation but others do not.

4. Prepare a litigation strategy.

If financial compensation will not address your potential losses, get urgent advice on whether you can go to the High Court for interim relief if you need to force compliance with a contract, get clarity on the impact of a force majeure clause, or to defend yourself against any claims that may be made against the business. Understanding events that have occurred along the supply chain (such as terminations or exclusions) and whether they will be applicable and appropriate in the circumstances, as well as whether satellite claims could arise. Has a force majeure clause been used appropriately, or declared elsewhere along the supply chain? Can the force majeure claim be opposed if inappropriate? If you are defending a claim, has the claimant used reasonable endeavours to mitigate the impact?

5. Learn from experience.

Learning from experience is an important element of contingency planning. The COVID-19 outbreak has exposed shortcomings in many contingency plans and once the dust has settled, companies should review their response and their contractual exposure should a similar crisis occur in the future. 

We’re expecting to see a sharp rise in legal activity in the coming weeks and months; it is time to be ready to respond.

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