The unprecedented situation caused by the COVID-19 pandemic has created unique challenges for businesses globally. In many cases, relationships between organisations can be managed in a pragmatic way during this difficult time and disputes can be avoided, however what can you do if you cannot agree a commercial solution?
We have prepared a short guide to some of the key issues to think about when deciding next steps.
Reviewing your contracts
What is the governing law?
Governing law provisions are important because they will impact the interpretation of the key provisions in the contract, for example a force majeure provision or, where there is no force majeure provision, what non-contractual remedies are available;
What are the parties' termination rights under the contract?
Depending on the agreement, there may be a right for one or both parties to terminate if a particular event occurs, or by giving the counter-party notice of your intention to terminate.
If there are clear termination provisions in the contract this can provide a way to bring the agreement to an end with clarity about the consequences. Most alternative approaches come with increased risk and uncertainty because they are open to interpretation, and therefore challenge.
Is there a force majeure provision, and if so what is the scope?
If the contract contains a force majeure clause then you should carefully review the scope of the provision and identify whether COVID-19 falls within any of the events specified.
You should then review the steps required to invoke the force majeure clause, consider whether there is an obligation to mitigate the effects of a force majeure event and, if so, what you might be required to do to meet that requirement.
Is it in your commercial interest to rely on a force majeure provision?
There are various commercial considerations to be assessed before relying on force majeure.
- whether declaring force majeure under a contract or receiving a force majeure claim from a counterparty may impact on insurance arrangements;
- whether there are wider reputational risks and potential damage to long-term supply relationships if force majeure in invoked;
- whether any causation test is met, or if there are other contributing factors to the potential contractual failure; and
- the longer term consequences of invoking force majeure, for example, termination.
How should you resolve disputes?
Contracts will often set out an agreed mechanism for resolving disputes. This can be as simple as specifying which court has the jurisdiction to hear the dispute, or it can be a complex series of steps to be taken that might include negotiation, mediation and/or arbitration.
It is important to understand what will be required because this often informs the approach to terminating a contract.
How do you give notice?
Force majeure provisions often include their own specific notice provisions that must be followed. Even if they do not, the general notice provisions within the contract will continue to apply and must be followed carefully to avoid any technical challenges.
What is the risk if you get termination wrong?
In many cases, there will be grounds to challenge any attempt to suspend performance, or to terminate the contract. Before taking steps to do so it is important that you understand your potential liability for damages.
This can be calculated in a number of ways, but you should identify the value of the goods/services.
Other practical considerations
- If there is no force majeure provision but COVID-19 prevents you from performing your contractual obligations you should consider whether this is so significant that the purpose of the contract has been frustrated.
- The drafting of force majeure clauses in any new contracts should be looked at very carefully and, if relevant, you should consider agreeing what the position should be if either party is affected by the COVID-19 outbreak and reflecting that agreement in the contract.
- Review your business continuity and disaster recovery policies and arrangements (and those of key suppliers) to ensure suitable plans are in place to reduce the impact of the outbreak.
- Ensure you are monitoring the development of the COVID-19 outbreak and the measures taken not only in your own jurisdiction but also in those of your key suppliers and customers.
- Consider other supply options, or cancelling or reducing orders. This should be done in a way that does not breach or undermine your existing contracts or arrangements.
- Discuss realistic delivery schedules with suppliers and buyers and keep in regular contact with these and any logistics partners. It may be appropriate to agree variations to certain contracts. These variations may apply temporarily.
- In having discussions with customers, provide reassurance and be careful to avoid suggesting that you cannot meet your obligations as this may provide the customer with a right to terminate.
- If you cannot reach a commercial resolution, think about whether mediation or other forms of dispute resolution might result in a negotiated settlement. The cost and uncertainty of litigation, particularly at the moment, means that it is even more important to explore all options before raising a claim.
We are working with clients to help them through these difficult times. If you would you would like us to help you, please get in touch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.