Coronavirus/COVID-19: Implications for Commercial and Financial Contracts

The experts at Skadden weigh in on whether the epidemic constitutes force majuere as a legal basis for nonperformance under financial and commercial contracts.

The outbreak of coronavirus (also known as COVID-19) is reportedly impacting global manufacturing, transportation and cross-border supply chains underpinning many aspects of international trade and commerce. Some companies are asserting that the outbreak constitutes a force majeure event or gives rise to another legal basis excusing nonperformance under commercial contracts. We are advising clients on numerous legal issues relating to the outbreak, such as proper disclosure by public companies of the impact of the outbreak on the company. Furthermore, companies that are negotiating commercial agreements today should proactively consider the appropriate allocation of risk and consequences of further business deterioration resulting from the coronavirus outbreak.

The impact of the virus on a particular business and under a particular contract will be fact-specific. For companies that are considering issuing force majeure notices as well as the companies that are receiving them, it is important to review the relevant agreement together with a company’s other material agreements to ascertain all rights and obligations. Notices may need to be given within defined time periods. Also, the terms of the agreements and the applicable law govern the scope of potential defenses to nonperformance. An assessment of available insurance coverage should also be performed, and insurance claims should be made on a timely basis. We provide below a summary of the relevant principles and possible steps in evaluating these issues.

Exposure Assessment and Action Plan

Parties to commercial agreements impacted by the coronavirus outbreak should promptly analyze their rights and obligations. This entails:

• identifying key provisions of material contracts that may be affected by the recent events (e.g., representations/warranties, covenants, termination rights, conditions, force majeure clauses or “change in law” clauses);
• identifying notice requirements that have been or may be triggered;
• considering whether there are alternative means to perform contractual obligations or proactive steps that can be taken anticipating the potential future effects of the outbreak;
• analyzing the potential consequences of a breach and/or default;
• managing communications with counterparties, bearing in mind the importance of global coordination of local relationships to ensure a consistent approach; and
• understanding local regulatory actions and restrictions, including reviewing existing regulations (e.g., on health and safety) and monitoring new edicts in real time to determine whether they require the company to take steps or make decisions that may affect contractual commitments.

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Many thanks to Richard Levick for the tip to this article.