This article explains key contract clauses that may be impacted by the COVID-19 crisis. Organizations will be better prepared for a possible second wave of the disease by reviewing key clauses related to infectious disease and similar unexpected crises. The article also discusses additional considerations, like insurance and cancellation notices, along with the use of digital technology to facilitate preparedness. Estimated read time: 9 minutes
Across the world, organizations are experiencing issues with productivity due to the inability of employees to use offices and travel because of the risk of exposure to the coronavirus (COVID-19). Almost all facilities have been shut down in an attempt to “flatten the curve” of the virus’ spread, creating problems that transcend industries and organization size. Accordingly, many businesses need to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure and other clauses to excuse performance temporarily or even permanently.
While in many cases, organizations are finding little refuge in existing contractual terms. Preparation is key and with a sound strategy and strong technology, they can be better future-proofed (at least prepared) for various business environments including a pandemic.
Key Clauses to Consider
When analyzing contracts to determine the availability of a temporary or permanent remedy, legal scholars have suggested a wide range of clauses to consider. Top of mind when contemplating the impact on contracts related to pandemics and specifically infectious disease, COVID-19, is the force majeure clause.
It excuses a party’s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations. Here’s a sample force majeure clause:
In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
Contract language is the predominant factor in interpreting force majeure clauses, contracting parties should carefully consider how they draft such provisions to allocate risk appropriately.
Force Majeure Challenge 1: Clarity is Key.
Recent events, including the declaration of COVID-19 as a “pandemic” along with bans on gatherings and movement have altered the force majeure landscape in a manner that may impact the availability of such provisions to non-performing parties. The most clear-cut situations would be those where the force majeure clause specifically references “infectious disease” (which the example above does not) and eliminates any requirement that the event be wholly natural, as opposed to political (eg, including “acts of government” along with “acts of God”).
Force Majeure Challenge 2: Then What?
Another major consideration when drafting such clauses is the appropriate remedy. Will the force majeure event render the contract:
null and void? or
temporarily suspend performance?
Again, since contract language is paramount in these instances, the contract drafter must be abundantly clear. For example, if your business desires the flexibility to terminate the contract completely during a hypothetical second wave of the virus, or a similar pandemic, the document should specify something to the effect of:
“Upon the occurrence of any such force majeure event enumerated [in reference paragraph] then [both parties | only one party] may immediately terminate this Agreement and shall have no further rights, obligations or entitlements under this Agreement.”
Though force majeure will likely be the most discussed clause in this context, there are other clauses that could potentially be connected.
Doctrine of Impracticability
The doctrine of impracticability excuses nonperformance or delays in performance of a contract if an unforeseeable event materially changes the nature of a party’s obligations under the contract. Whether or not this doctrine can be invoked is heavily dependent on the facts and circumstances of a given situation.
It is vital that the contract drafter is explicit with language to effectively apply this doctrine in future business environments and should a second wave of COVID-19 occur.
Frustration of Purpose
Similarly, the doctrine of frustration of purpose may apply when the primary reason for entering into a contract becomes impossible due to some event. In the case of COVID-19, one could imagine this doctrine being invoked, in this example:
Someone rents space to watch a July 4th parade and fireworks show. Due to event cancellations and bans, they can no longer use the rented space. Thus, the original purpose of the contract has been completely frustrated.
Future-proofing for such a situation and use of this contract doctrine means the contract authors should carefully detail such intent in the document.
Delivery of Notices
Contracts will often provide that notice of a termination event must be delivered to a party by hand, and some even require that notice be personally delivered with a return receipt in order to be effective. In a changing world, and with COVI-19 persisting, such hand delivery may no longer be possible. Most contracts will specify an office address for the delivery of such notices, and most offices are now closed. Moving forward contract authors should, at minimum, consider using email addresses for alternate delivery of notices.
Business Interruption Insurance
Moving outside of the four corners of the contracts, companies should consider whether insurance protection might be available to address certain losses and interruptions resulting from the pandemic. Companies anticipating potential business interruption should review potentially applicable insurance policies and provisions, including business interruption and contingent business interruption insurance.
Based on the impact of COVID-19, companies should proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from the COVID-19 would be covered. Also, a review of their policies’ insurer notice requirements to ensure their scrupulous compliance with those provisions in the event coverage is needed.
Also, legal commentators recommend that insurers take proactive measures by reviewing their standard policy language in anticipation of such claims, and preparing themselves for the near-certainty that insurance coverage lawsuits will be filed in connection with uncovered losses.
Note: A full review of these business interruption insurance policies, its any limitations and how policies have changed in the wake of other historical infectious disease outbreaks is beyond the scope of this article.
Technology to Help You Along the Way
A few ways we can help contract future-proofing by way of technology include:
A central repository with powerful search capabilities
Value: easier to quickly assess which contracts may be affected by COVID-19.
Modern contract AI tools can help here too: for instance, to stress test the repository, while CLM systems (Conga, Apttus, etc.)allow you to search for affected contracts by clauses and terms, to streamline mass amendment, and to handle changes using Microsoft Word while seamlessly connected to the CLM application.
COVID-19 is having a significant and harmful impact on businesses and their ability to perform under their contracts. Many epidemiologists have theorized that a second wave of infections may occur later this year. If that happens, your organization needs to be prepared. Updating your clause language, reviewing contract practices (e.g. delivery and insurance), and using digital transformation technology are our recommendations to increase your likelihood for success.