Assessing The Contractual Impacts of COVID-19

Assessing The Contractual Impacts of COVID-19

7th April 2020

Assessing The Contractual Impacts of COVID-19

By Charles Dimov, VP of Marketing at ContractPodAi

By now, the COVID-19 (coronavirus) pandemic has disrupted nearly every aspect of our personal and business lives.

The silver lining of this working-from-home (WFH) and “shelter-in-place” world is that we are likely spending more time than usual with our nearest and dearest, both online and offline. But at this time, we would like to share our expertise in the contract management realm. We would like to explain how contractual obligations are influenced by times of uncertainty, not to mention the contractual impacts of COVID-19, in particular.

The following insights about these contractual impacts will inform and enable you to make the best of your self-isolation in this unprecedented business climate.

Force Majeure Clause in the Spotlight

According to global law firms, such as Dentons, many international companies have decided to trigger a force majeure (FM) or “Act of God” shield against breach of contract terms. This is happening in countries like China and large economic and manufacturing hubs like Hong Kong, where there has been a failure to meet trade agreement terms.

French for “superior force," force majeure is rather fitting for many professional sports teams in leagues, such as UEFA, MLB, the NHL, and the NBA. Sponsors, for example, are recouping investments in ads that simply will not run. 49% of American workers never worked from home before the COVID-19 outbreak.

Law firm Baker McKenzie says that shipbuilders, medical device manufacturers, and international supply chains have been interrupted due to COVID-19, too. But they can leverage force majeure to protect themselves from penalties for non-performance. They also say that buyers of these products and others may benefit from force majeure clauses if there are downstream obstacles to getting goods to market.

Nearly two weeks before the World Health Organization classified COVID-19 as a pandemic, the China government protected some 3,000 businesses by issuing force majeure certificates on their behalf.

Impact of Coronavirus on Travel and Hospitality Industries

A recent Hospitalitynet.org article reveals that travel and hospitality supports 15.8 million jobs in the United States - or one out of every 10 jobs in the country. But the U.S. Travel Association predicts that some 5.9 million travel jobs will be lost by the end of April 2020. As travel grinds to a near-halt worldwide, to stop further cross-border spread of the coronavirus, many travel companies will need to shield themselves with force majeure contract clauses.

According to Conference and Incentive Travel Magazine, however, there are some travel-industry contracts, in which force majeure clauses do not exist. In these cases, contracting parties must try to terminate the contract through the doctrine of frustration of contract. It is unlikely that anyone could have foreseen the timing, scope, and severity of the pandemic at the beginning of the performance of the contract. As such, courts may agree to terminate the contract and release both parties from their agreed terms.

Do Insurance Policies Cover Business Interruption Due to Novel Coronavirus?

As is often the case in these matters, that all depends.

Many U.K. brokers and carriers interviewed by InsuranceBusinessMag.com emphasized that COVID-19 is very novel. So it is not one of the diseases covered by business interruption (BI) provisions in corporate insurance policies.

In the same article,  Momentum Broker Solutions points out that some insurance policies do not specify diseases that cause business interruption. Instead, some contracts specify notifiable diseases or infectious diseases that are identified by federal governments for monitoring and control.

Also, some insurance policies may carry a clause mitigating against “non-damage denial of access” if local authorities shut down or cordon off a business due to a disease. A claim for coverage may be made under this provision.

Manual Search of Protective Clauses Takes Significant Time and Effort

Finding clauses like these in contracts can be extremely time-consuming - and feel much like finding a pin in a barn full of haystacks. But an AI-powered contract management repository, which is enables contract managers to search by contract clauses, can mitigate penalties and loss of reputation, or may excuse performance outright.

Many of the scenarios described above relate to the contract party on the supply side. Now, let's consider the circumstances for businesses and organizations buying critical products or services.

Say you are a director of procurement waiting for components or supplies to manufacture respirators or testing kits. And a hospital or government employee is chomping at the bit, as they wait for life-saving devices - a couple of components of which are late to arrive. In this case, you will want to be able to access the contract quickly and understand your remedies, should the supplier fail to live up to their end of the contract.

In-House Legal View of the Pandemic

Finalizing legal remedies may take longer, however it's best to be aware of your contract obligations to assess contractual impacts of COVID-19.Your general counsels and attorneys may find themselves with some time on their hands when courts are closed during the pandemic. They can help out by providing your team with legal advice around some of the disruptive business activity, which may be giving you heartburn. Finalizing legal remedies may take a while, though. As such, it is best to be aware of your contract obligations - and those of the other party or parties to the agreement.

What would you do if your business purchased products or services from suppliers that declare bankruptcy or cannot deliver due to staffing shortages? You will want to either find an alternate supply source or understand your legal exposure for late delivery.

Get Secure, Cloud-Based Contract Access While Working Remotely

Once more, these rather surreal circumstances have forced many of us to work remotely and shelter at home.

But a survey conducted by SHRM found that 49 percent of American workers never WFH before the COVID-19 outbreak. Another 23 percent said that they only did so on special occasions. Yet, an unprecedented number of organizations have scrambled to support information workers, executives, and other professionals who have no choice but to work remotely.

Many users around the world are securely accessing vital documents, such as contracts, from SaaS apps like ContractPod on cloud platforms like Microsoft Azure. Interestingly, these same cloud services are being used by first responders, researchers, and public health scientists responding to circumstances related to COVID-19. Such remote access goes a long way toward assessing the contractual impacts of COVID-19 on a global scale.

So is your business like the 62 percent of those we interviewed in our recent research study - those who do not have a digital contract lifecycle management solution? Are you experiencing business continuity challenges, as your newly distributed workforce tries to sustain a semblance of “business as usual?” Then download our latest handbook, "Contract Management Crisis Preparedness For GCs: Legal Teams’ Contingency Planning For COVID-19 (Coronavirus) & Other Crises." And find out how ContractPodAi can help you with your own legal digital transformation.

AUTHOR:

Charles DimovCharles Dimov
VP of Marketing
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