13 March 2020

Will Coronavirus infiltrate your contracts too?

With the effects of Coronavirus sweeping across global markets, businesses are evaluating the practical impact on their trade. Many industries are already badly affected – whether by imposed travel bans or the quarantining of employees and customers – and business owners are concerned that disrupted trade may leave them with contractual liabilities.

How might existing contracts provide for a scenario like the current unravelling Coronavirus pandemic?

Force Majeure and MAC clauses

Many agreements include force majeure (or ‘act of God’) clauses. These operate as contractual ‘get-out-of-jail free’ cards, which may provide protection if a party is genuinely prevented from performing its obligations. Much will depend on the specific wording of the contract – for example, references to a ‘pandemic’ or ‘epidemic’ would be helpful – but even without specific terminology, a force majeure clause could, potentially, cover scenarios such as being unable to comply with delivery of goods because of mandated travel restrictions, or a failure to provide services because of staff in self-isolation.

Some agreements will contain material adverse change (‘MAC’) clauses. Depending on the wording used, these may allow a party to terminate or vary an agreement where the surrounding circumstances have become materially different to those originally in play. This could potentially allow a party to terminate an already exchanged contract relating to the acquisition of a business in a heavily-affected industry, such as aviation.

Other provisions

There may also be other more general provisions of the contract, which could be relevant when considering disruption experienced as a consequence of Coronavirus. For example:

  • In the absence of a force majeure or MAC clause, specific penalties could be incurred for missed deadlines or deliveries.
  • A failure to achieve budgeted targets or contractual milestones could constitute a default event allowing one party to terminate.
  • If you have recently acquired or sold a business with deferred payments based on business performance, actual recovery under these provisions could prove significantly lower than anticipated.

Insurance

If you already have insurance, it is worth reviewing the policy wording to check whether it covers business interruption caused by Coronavirus. Similarly, depending on specific circumstances, it might be appropriate to review any ‘Key-Man’ policies taken out for the benefit of the business. It is unlikely that insurers would wear the risk of providing new policies which specifically covered the current crisis.

The pragmatic approach

If your business is disrupted, your suppliers, customers and employees are more than likely in a similar position. Given the nature of unfolding events, the most sensible option may be to start the commercial discussion early on and agree acceptable solutions before disruption becomes a business threatening liability. In most cases, all interested parties will want a long-term business relationship to out-live what is hopefully a short-term crisis.

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Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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