The COVID-19 outbreak has impacted all aspects of life. In the face of massive uncertainty, companies should immediately address the effects of the pandemic on existing and future contracts and matters of corporate governance.
Here is a checklist regarding contract issues companies should consider:
Existing Contract Review
Companies need to review existing contracts where COVID-19 has or will impact performance. This may include determining whether you or your counter-party may assert force majeure, impossibility or impracticality of performance, or frustration of purpose as a defense to non-performance. For a closer look at these issues, please see “Not ‘If’ But ‘When’ — Navigating a Force Majeure Clause During the COVID-19 Pandemic.”
All contracts allocate risk among the parties. When reviewing your contracts, consider to what extent the terms of the contract allocated the risks associated with a global event, such as a pandemic, and, if so, to which party. If the contract did not allocate this risk to either party, then the non-performing party may benefit from the concepts noted above.
Finally, consider reviewing your existing insurance policies for business interruption coverage. For a more in-depth analysis, please see “Insurance Coverage and Coronavirus: Business Interruption, Event Cancellation and Travel Insurance.”
If you are unable to perform a contract, or can only perform in a limited manner, it is essential to provide proper notice to your counter-party. Take care in drafting this notice as it is likely to be a critical exhibit in any future breach of contract action. Companies should carefully review the notice provisions of any contract to ensure compliance with any content or delivery requirements (recognizing, of course, that certain methods of delivery may be compromised in light of the current situation). Send out any such notices early, before there has been a failure, rather than after you have been unable to perform. As delays continue, frustration will build, but your counter-parties are likely to be more understanding now while events are still in flux. They are also likely to appreciate your addressing issues earlier rather than later.
Strategy for Addressing Contract Issues
Given the nature of this global pandemic and the uncertainty around when it will end, it is highly likely that at least one of your contracts will be in danger of a breach (by either you or your contract partner). Determine whether you can work collaboratively with your counter-party to ensure as little interruption as possible, or whether you must pursue damages caused by a breach or shift the existing risk. This will be a fact-sensitive determination, and may change over time. Be sure to anchor any decision in the realities of the effect the pandemic is having on your business and your business partners. It goes without saying that this is not a time to take advantage of the crisis. For more detailed survival tips, please see “Survival Checklist for Businesses During a Pandemic.”
Your by-laws and other governance documents may not contemplate the inability of your board of directors or managers to meet for an extended period of time. Review your governance documents to determine:
- What happens if your company cannot form a quorum for a meeting?
- Who will sign checks if all authorized persons are impacted by the virus?
- Can you hold board meetings by phone or teleconference?
- Can board members vote by email?
- How will you satisfy any meeting requirements during a quarantine or shelter in place order?
It is imperative to review your governing documents, organizational charts and distribution of authority to ensure your business can operate and govern itself with as few interruptions as possible. Good communication within the organization is key, so consider whether you need to update or expand your contact information for members within the leadership structure.
Many contracts have existing dispute resolution clauses. Do your contracts require mediation or an in-person meeting? This may be impossible under current quarantine guidelines. Further, as courts are closing across the country, they are generally not well-suited to allow for remote advocacy, so many disputes are coming to a standstill. For future contracts, consider arbitration, which offers greater flexibility, contemplates remote hearings, and thus may be a better approach.
While we all hope this current crisis is temporary, we may face continuing disruption over the next several months and perhaps even years. This is where an ounce of prevention is worth a pound of cure. Determine precisely why your existing contracts do not provide clear guidance on how to handle this current crisis. That review will help you and your future counter-parties address the allocation of risk from future disruptions. Further, pay particular attention to what government action directly affected your business as that may be a basis for downstream contractual relief.
These are just a few issues to consider when examining existing and future contracts and ensuring business operations during the COVID-19 crisis. We know that you are addressing a number of immediate concerns, but early review of your contracts and governance documents may help you weather the current circumstances and recover promptly once the immediate emergency has subsided.
Brian A. Berkley, Jacob S. Perskie and Emily I. Bridges are attorneys in Fox Rothschild’s Litigation Department. If you have questions about this alert, Brian can be reached at 215.299.2043 or firstname.lastname@example.org; Jacob can be reached at 609.572.2225 or email@example.com and Emily can be reached at 864.751.7618 or firstname.lastname@example.org.