How to Write Contracts for the Unexpected (Like Coronavirus)

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The COVID-19 pandemic is hitting businesses hard and it is well-prepared companies who are faring the best. Conferences and trade shows have been canceled, stores are closing, manufacturers are scaling back to a skeleton crew, and supply lines are slowing to a crawl. Many companies are looking hard at their contracts to see what their responsibilities are in these uncertain times. 

Here are three things you should consider if your (or your vendor’s) ability to fulfill a contract has been impacted by the coronavirus.

Does Your Contract Have a Force Majeure?

Some contracts include a provision for force majeure, which excuses a party’s obligations under certain circumstances beyond their control that make delivering on them inadvisable, commercially impractical, illegal, or impossible. Writing in the National Law Review, Greenberg Traurig counsel Bryan X. Grimaldi said: 

“While “disease” might be a specified force majeure event in your contract, adverse parties may contend that a party’s performance is not excused due to the Coronavirus’ potential impact, especially if your business is solely in the United States.”

Some contracts may specify disease as a qualifying event, David & Kuelthau President Joseph E. Tierney IV wrote. Although there is a precedent for epidemics being covered in general force majeure clauses, it may not apply without specific reference to epidemic or pandemic language, Tierney said.

 If the force majeure can’t help, Act of God clauses may apply but will likely be contested because other parties may argue that recent pandemics foreshadowed COVID-19 and that businesses should not have been blindsided by it, he said. These types of clauses can be pretty common and at times like these, they can be a valuable resource to navigate performance when your ability to deliver is outside your control.

What Can You Do if Force Majeure and Act of God Don’t Apply?

The first thing companies should do is assess what their contractual obligations and expectations are. What is expected of you in the next few months and what do you expect from your partners? Get a lay of the land and do the math on the impact to your company. Next, look at your insurance options. Grimaldi said business interruption insurance may be an option in some circumstances.

“As more businesses are shuttered, and meetings are canceled, companies need to assess their contractual options and liabilities,” Grimaldi wrote. “While business interruption insurance may be an option in some circumstances, historically there has been a “widespread exclusion of infectious diseases” from property and casualty insurance policies—which includes business interruption—by insurers in the US and Europe.” 

Your next course of action is to lean on your relationships or hope for good customer service. For example, if your business had a booth at an upcoming conference that was canceled, you may not be able to get your exhibitor ticket cost back but you might get money back for the airline and hotel. If you’re the receiving party for the contract, consider how much the business relationship is worth to you versus the individual contract cost. In a crisis, a little bit of generosity can go a long way toward forging lasting relationships.

How to Write Contracts with the Unexpected in Mind

Now is also a good time to audit your current and upcoming contracts – incoming and outgoing – for clauses that will protect you in a crisis. Consider how vulnerable your company operations are to:

  • Local and pandemic diseases
  • Climate change impacts like storms, flooding, and drought
  • Civil strife
  • Changes in international trade
  • Labor disputes
  • Economic disruption
  • Localized and global shortages and supply-line interruptions

Work with legal teams to develop appropriate language and make sure you cover yourself going forward. A clause library, like the one at the heart of Anapact, will help you keep track of contracts and what protections you have written into them. COVID-19 has interrupted just about every aspect of our lives and our businesses are no exception. The steps you take now can help you curb the cost of the pandemic to your operation and prepare for an uncertain future.

Anapact is world-class contract management software built for small- and medium-sized businesses. It is a single repository for your contracts with robust features to support contract development, reviewing and redlining, execution, storage, audit, and renewal. Get a demo here.

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- About the Author

Picture of Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.