Navigating the impact of COVID-19
How to manage contractual risk
Companies may have contractual counterparties that fail to perform their obligations, or they themselves may be unable to perform. The COVID-19 outbreak may also be used to attempt to get out of unprofitable contracts.
Non-performance could be caused by:
- labour shortages and reduced productivity;
- disruption to supply chains, closed factories and plants;
- travel restrictions and quarantine measures;
- import and export restrictions; or
- restrictions imposed on the workforce.
However, in the following circumstances, non-performance may be excused.
Contracts often contain force majeure clauses that excuse non-performance in the manner agreed between the parties.
Key considerations are whether:
- COVID-19 caused the failure to perform;
- viruses/epidemics are listed as force majeure events;
- there is a duty to mitigate; and
- the event can be overcome.
Where a contractual obligation may be partially fulfilled, such as by allocation of materials among customers, failure to make a reasonable allocation (ie electing to supply one customer over another) can break the chain of causation and result in relief being denied.
Similarly, force majeure may not provide relief in respect of those parts of a contract which can still be performed.
Under some civil law systems relief may be available under statute, irrespective of contractual force majeure clauses.
Typically, the event must be:
- an event for which neither party is responsible;
- unforeseeable; and
- incapable of being overcome.
Be aware of the potential for conflict between force majeure relief available at law and contractual force majeure clauses under a different governing law.
Contracts often contain hardship, change in law or price fluctuation clauses (eg where contracts are linked to commodity prices).
Some civil law systems recognise the concept of economic impossibility under statute. It applies where the equilibrium of the contract is altered in such a way that it becomes excessively onerous for one party to perform.
Common law systems recognise the doctrine of frustration, which requires a change in circumstances that renders performance under the contract radically different from what was originally envisaged.
Mere difficulty in performance or commercial hardship are not sufficient.
Breach of other contractual terms
Many contracts contain representations and warranties made by the counterparties, some of which will repeat after the contract is entered into.
Contractual undertakings and covenants impose continuing obligations on counterparties.
Consequences of breach of representations and warranties or of undertakings/covenants will depend on the terms of the relevant contract but could include a right to terminate for the counterparty.
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If you would like to discuss these issues in more detail, please speak to your usual Freshfields contact or one of the lawyers listed below who can direct your query.