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Re-negotiating contractual relationships in wake of COVID-19

By Robert J. Kerwin

As we all well know, COVID-19 is upon us and the World Health Organization has officially declared we are living during a pandemic. Few medical authorities at this point are willing to speculate exactly when the outbreak will flatten, or life will return to something approaching normal. Although social media know-it-alls openly bandy about a fix, leading health authorities do not expect a resolution in the short term.

‘Wait and see’ is not a strategy

While the COVID-19 health issues dwarf all else, we lawyers must necessarily also address the emerging legal issues when our business clients are unable to meet event commitments, supply chain deadlines or other contractual responsibilities. Travel restrictions, quarantines, lockdowns, government-ordered closures and shelter-in-place requirements are all happening dynamically.

Amidst all of this unprecedented activity, an early company contract assessment should somehow be undertaken, if possible, as to all contracts. Non-performance during the COVID-19 crisis without a valid legal reason risks liability. Companies unable to meet their contractual commitments should seek to re-negotiate their performance obligations for many of their obligations. 

Though I am certain my re-negotiation experiences this month are neither unique nor surprising, listed below are some key takeaways:

  1. Event commitments, deadlines and impending supply chain commitments likely will not be successfully resolved by governmental action in the short term.

Some countries, such as the People’s Republic of China, have reportedly provided “force majeure” certificates that ostensibly excuse parties because of governmental action. Since many contracts with Chinese companies incorporate international law, it remains to be seen as to the legal effect of these certificates. 

Hence, while the COVID-19 governmental restrictions could perhaps enable a party down the road to excuse or avoid an obligation by exercise of rights under a force majeure clause, or perhaps by seeking to invoke the doctrine of impossibility of performance, it is important that you immediately examine your company’s contracts and any contract amendments.

For some companies that involves literally thousands of contracts. Hopefully your contract risk assessment matrix will permit you to identify readily the contracts with the greatest risk. Anticipating that governmental decrees may resolve the situation is not a strategy.

  1. Review all contracts and amendments to the contracts.

You may need to contact your business colleagues and diplomatically inquire as to whether they may have agreed, without your knowledge, to additional amendments (and could they forward the same).

Having spent significant time as in-house counsel, I well know this happens. There may even be emails or oral understandings at variance with the executed contract, which has an “integration clause.”

At this point, you may be thinking why am I considering parol evidence if these emails and oral understandings may likely not supersede the original agreement? However, if you are re-negotiating, you need to know about them. Don’t be too surprised if some contracts turn up from your review of which you unaware.

Also, be sure to check whether there are additional provisions online that may have been incorporated by reference. Last week I clicked into the “Terms and Conditions” of one contract (15 pages long) that significantly altered the original cancellation provision in the executed contract.

You may need to wade through a series of lengthy documents when addressing click-wrap contracts. These include “Terms and Conditions,” “Terms of Use,” “Privacy Policies” and “End User License Agreements.”

  1. If you are arguing initially about the scope of your force majeure contract provision, your re-negotiation is likely not going well, so don’t always start with it.

For many years, a force majeure clause has been a commonly used boilerplate provision. It provides that a party will not be liable for its obligations under the contract as a result of an “unforeseen” event that the party could not, even with all due care, have foreseen or avoided.

In the wake of the World Trade Center tragedy and SARS/MERS outbreaks, the definition of what constitutes a force majeure event was expanded, depending upon the contract, to include acts of terrorism and some specific outbreaks. This expansion of the definition of force majeure does not automatically resolve the question of whether the COVID-19 pandemic falls within the definition of force majeure. You need to review the entire agreement. 

Often the contract will set forth the specific events that constitute force majeure, including acts of God, war, threat of war, civil strife, terrorist activity, riots, acts of a governmental authority or industrial disputes. It is not entirely clear that parties will readily agree that a “pandemic” is an “act of God.” Indeed, recent press reports have featured epidemiologists expressing their view that the pandemic was a “foreseeable” event.

Depending on the force majeure clause, you will also want to assess if the event hindered or delayed performance and were there no reasonable steps that could have occurred to mitigate.

Keep in mind that the party with whom you are re-negotiating may not be able to recover on its business interruption coverage. Business interruption insurance typically covers only “directly physical loss or damage to covered property.” Hence, it is not at all clear that the other party’s business losses will be covered by existing insurance. While there are some insurers that have offered pandemic endorsements, I am advised that a number of insurance companies have eliminated that option.

Many commercial agreements have included “hell or high-water clauses,” which compel ongoing payments irrespective of the circumstances. Those provisions should be vetted and re-negotiated. 

Some have suggested that force majeure is implied in each and every contract even if it is not specifically referenced. In my brief survey, I have found little support for that interpretation.

  1. Don’t just agree to a new deadline or date without including provisions that allow some further delay/postponement, or at least a duty of the parties to negotiate again, in the event a COVID-19 resolution has not been achieved by the new deadline.

With a tip of the hat to Captain Obvious, this suggestion should be apparent but sometimes the push from your business colleagues to get relief from the looming contractual deadline that cannot be met may force you to accept a new contract deadline—which, upon reflection, will also not work. 

The other party could have already received significant pre-delivery deposits. Having recently negotiated the postponement of industry conferences, I note that irrespective of the jurisdiction, the hotels and conference centers were initially receptive to “rescheduling” but not to “cancellation.” The business problem was that the hotels wanted to re-schedule for a specific date.

Further, the hotels demanded execution of a written contract amendment in which the parties acknowledged that if the parties were unable to proceed on the new date, the hotels had the right to recover liquidated damages. Those damages were acknowledged to be “reasonable.”

This contractual position was being advanced notwithstanding that no one really has a crystal ball to predict with any accuracy when attendees can travel again safely. A middle ground was eventually reached with an assigned new date and a commitment of the parties to negotiate in good faith in the event the new date did not work.

  1. Don’t forget to impose a litigation hold or records retention program if your contract review establishes a need to retain documents.

You must communicate a litigation hold or face the potential of claims of spoliation in the event that your re-negotiation proves unsuccessful and ultimately the matter is resolved through litigation.

Following the proscriptions of ESI requirements and the pronouncements in cases such as  Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 216-218 (S.D. N.Y. 2003), “Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure preservation of relevant documents.”

  1. When working from home, be sure to use the mute button.

Since many of us will be undertaking our re-negotiations from our home offices, I offer one non-legal tip: Be sure to press the mute button when not speaking.

I had the mixed pleasure of being on a conference call last week in which one of the lawyers was instructing his daughter in a somewhat animated voice about the need to take the dog for a walk. At another point, someone was snoring so loudly that the conference call host had to mute everyone in order to proceed with the call.

But my favorite part was when another participant summed up the call (apparently to a colleague on his cellphone) as pretty much all @#$%. While I appreciate candor, I think that participant would have been well advised to ensure his mute button was on.

Robert J. Kerwin was formerly president of the Massachusetts Municipal Lawyers Association and co-chair of the Massachusetts Bar Association’s Business Law Section Council. His current practice focuses on compliance and risk issues. He can be contacted at rkerwin@kerwinlegal.com.

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