Many businesses are apprehensive about committing to contracts during the current Coronavirus driven uncertainty, but “Corona Clauses” may be the solution.
Because of the uncertainty caused by the Coronavirus pandemic and resulting lockdown restrictions, many businesses are understandably hesitant to commit to new contracts and projects. This can be a tough decision especially where such opportunities are potentially lucrative or deals were close to completion before the outbreak.
However, before any deals or opportunities are put on hold due to COVID-19, a prudent business should consider whether the risks posed by the current Coronavirus uncertainty can be mitigated to an acceptable level. An effective way of mitigating such risk is to use “Corona Clauses” in the relevant contract to enable commitment to projects and deals whilst also protecting business interests.
Set out below are some types of clauses which could be used to provide sufficient comfort to enable contracts to be entered into notwithstanding the current uncertainty caused by COVID-19.
In summary, a condition precedent clause provides that the obligation to perform a contract (or parts of it) only comes into force once specified conditions have been met. They are useful in that they enable parties to contractually commit to a deal where certain other matters need to be resolved, or other criteria met, before performance.
A condition precedent clause can be tailored so that the obligations of the contract are triggered once the Coronavirus restrictions are lifted to the extent required to enable proper performance of the contract.
Such a clause could be particularly useful where a party wants to contractually commit to a deal where performance is difficult or not possible due to the current lockdown restrictions (especially where a deal was perhaps close to being finalised before the outbreak hit).
Condition precedent clauses must be very carefully drafted (especially in the context of the Coronavirus restrictions) to ensure they are not void or voidable for uncertainty and to ensure they properly identify and describe the conditions. Furthermore, extra care is needed if the other party falls within the definition of a “consumer”.
“Brexit Clause” Revisited
The term “Brexit Clause” has developed over the last year or so and relates to the adaptation of commercial clauses in business-to-business contracts for the supply of goods or services to protect against Brexit factors.
In summary, a Brexit Clause defines certain “trigger events” which may occur as a result of Brexit and have a material impact on one of the parties (for instance, the imposition of high import/export duties). On the occurrence of a “trigger event” bespoke rules and obligations apply to the parties intended to resolve the resulting issues to the commercial satisfaction of both parties.
The “trigger events” can be easily adapted to relate to the impact of the Coronavirus pandemic and such a clause may be useful where the current pandemic does not immediately prevent contractual performance but where there are concerns it could have an impact in the future (including indirectly through economic factors).
If a “trigger event” does occur, the parties could be required to renegotiate certain key terms within fixed parameters or negotiate an amendment to the contract in good faith to alleviate the effects of that event, failing which the contract would be terminated.
A principal objective of such a clause is to encourage all parties to have sensible discussions to find a solution which works for all where the commercial and economic landscape has changed significantly to when the original deal terms were agreed. As always, careful drafting is required to ensure such a clause meets each party’s objectives and detailed consideration must be given to the “trigger events” to ensure all foreseeable circumstances are adequately covered (which, as mentioned above, can be indirect).
Where a party has concerns about its workforce (including the impact on its ability to perform the contract if parts of its workforce are required to self-isolate), then the express ability to subcontract should be included to enable a party to subcontract its obligations. Again, such a clause should be carefully drafted not least to ensure it is acceptable to the other party (who may, for instance, want to ensure the original contracting party remains liable for its subcontractors).
Including a force majeure clause in a commercial contract can provide vital respite by potentially excusing one or both parties from performance following the occurrence of certain events which are outside a party’s control. Such a clause would provide a saving grace where the strict-to-apply common law principle of frustration fails, for example if performance of an obligation is not deemed impossible, and also means the party will not be in breach for non-performance.
While force majeure clauses often take the form of standard “boilerplate” wording, it should be noted that force majeure clauses are strictly interpreted and therefore must be carefully drafted to cover only specific events and real consequences to a specific party. Extra care should be taken as a requirement of force majeure is that the non-performance must be due to circumstances beyond the control of the party. Another is that no reasonable steps could have been taken to avoid or mitigate the event or its consequences.
For parties wanting to maintain their commitment to a certain transaction or business relationship, instead of terminating on a force majeure event, a long-stop date can instead be used to give the affected party time to recover from the event. Such a long-stop date will need to be carefully considered and drafted to reflect predicted timescales of the pandemic.
It is important for businesses to note that the Coronavirus pandemic does not need to put a halt to their future planning and contractual relationships. With proper commercial consideration and drafting, there are many different clauses and provisions which can be used during this period of uncertainty to allow trading to continue. If you would like to discuss your obligations under a current or proposed future contract and the potential effect of the Coronavirus outbreak, or you are thinking about incorporating the above clauses into your current commercial contracts, please contact Alex Clifton on 0116 281 6232 or email firstname.lastname@example.org.
Categorised in: Corporate and Commercial, Covid-19, NewsTags: Commercial Agreements, Company Law, Contracts, Coronavirus