COVID-19 and Commercial Contracts: Is it Time to Modify?Client Alert
The coronavirus (“COVID-19”) pandemic will likely create hardship for parties attempting to perform under many types of commercial contracts. Significantly, contracts requiring travel and/or involving the provision of goods and services are likely to be substantially impaired or impacted.
What to Do Now?
Inflexibility and hard line approaches may lead to disputes and expensive litigation. Global pandemic on the scale of COVID-19 has not occurred in over a century. For the modern business world and the United States legal system, this is truly a case of first impression. In order to avoid uncertainty, communication with counterparts regarding modification of existing obligations, may be prudent and lead to reasonable, mutually acceptable adjustments to the parties original deal.
Nevertheless, you should carefully review the material terms and conditions of your existing agreements to ensure you are informed as to your rights, obligations and likelihood of breach or timely performance.
Communicate and Modify
Now may be the best time to modify existing agreements. Following an honest assessment of each unique situation, parties are encouraged to cooperatively determine a path forward. Communicate with your counterparts and willingly work towards a mutually beneficial arrangement. Reasonable business partners will understand that the current pandemic was likely not within the contemplation of the parties when they entered into their agreement. Any such modification must be reduced to writing, signed by both parties and incorporated into the original contract.
Common terms to modify:
- Contract duration
- The goods/services involved in the contract
- Adding or subtracting goods/services covered in the contract
- The payment terms
- The delivery terms
Before negotiating modification, consider the following:
- Identify changes you feel are necessary and appropriate
- Note any contract provisions that seem unfair or unnecessary
- Note the date, time, and location when you chose to make modifications to the contract
- Determine the justification for modification (i.e. workforce, government directives, supplies, shipping restraints, etc… simply citing COVID-19 likely not enough)
- Try to predict how the changes might affect all parties' contract rights
In the event a party to a contract alleges it cannot perform as a result of COVID-19, the contract may provide guidance concerning legal rights and obligations. Most commercial contracts address the parties’ rights in the event of situations occurring outside of the control of either party. Most commonly, parties may be forced to interpret and/or rely on a ‘force majeure’ clause. Generally, a ‘force majeure’ clause relieves one party from performing a contractual obligation under certain circumstances that would make performance impractical, impossible, or even illegal. Pandemic may be a defined term, but more likely, the ‘force majeure’ language will not be so specific. However, parties should be careful of claiming a force majeure event prior to experiencing an actual delay or other impact.
The Contract Matters
The extent to which COVID-19 excuses or extends contractual obligation(s) is a fact-specific determination that will depend on the nature of the obligations and the specific language of the contract. More specifically, in the context of COVID-19, parties will want to take the following steps:
- Read the contract;
- Determine the extent to which the contract provides for suspension or termination of performance;
- Identify key provisions of contracts that may be affected by COVID-19 (e.g., representations/warranties, covenants, delay rights, termination rights, conditions, ‘force majeure’ clauses);
- Identify notice requirements that have been or may be triggered;
- Determine the extent to which COVID-19 prevented the party asserting an inability to perform;
- Consider whether there are alternative means to perform contractual obligations or proactive steps that can be taken anticipating the potential future effects;
- Determine whether the party asserting COVID-19 as a justification not to perform had the ability to mitigate its effect and the ability to perform.
- Analyze the potential consequences of a material breach and/or default;
- Manage communications with your counterparts, while coordinating internally to ensure a consistent approach; and
- Regularly review and update relevant regulations (e.g., local, state, national directives on health and safety) in real time to determine whether they require steps or decisions that may affect contractual commitments.
In these uncertain times, Brennan Manna Diamond is here to provide clarity and comfort. Feel free to reach out to a BMD professional for guidance as you work through your analysis.