As national governments take measures to contain the coronavirus and the COVID-19 epidemic it is important to assess the potential impact on your business. We have outlined the essential points to consider in reviewing your supply chain and contractual relationships and five steps you can take to try to mitigate the uncertainty caused by COVID-19.
Coronavirus and Force Majeure
Most commercial contracts contain a force majeure clause.
A standard force majeure clause will generally excuse a party from a delay in performing its obligations where it is prevented from doing so by factors outwith its control.
Clauses will often expressly define what "factors" qualify as force majeure. Others may rely on only a general definition such as "an Act of God, war, or conflict". On 11 March, the World Health Organisation declared that COVID-19 is a pandemic, which may be relevant to contractual interpretation.
It is crucial that each contract is reviewed to understand whether the COVID-19 epidemic could feasibly qualify as force majeure event, and what steps a party needs to take before relief can be claimed. For example, if a force majeure event is limited only to events outwith "reasonable" control, to what extent is it incumbent on an organisation to mitigate the impact of anticipated disruption? Is there a time limit on relief, after which one or other party can terminate?
If relief for force majeure does not apply, and a supplier cannot perform, what then? The doctrine of frustration can operate to terminate a contract automatically where performance is no longer possible - for example due to the destruction of the subject matter or where an event causes excessive delay. While the doctrine has a narrow scope, it's important to assess whether it might apply.
Business Continuity & Disaster Recovery
Maintaining and implementing a business continuity and disaster recovery policy is key to mitigating the risk of business interruption. This includes dealing with issues such as coronavirus.
Many outsourcing and supply contracts will include specific obligations on suppliers in relation to business continuity and disaster recovery. It's important that organisations understand how their suppliers' plans interface with their own internal business continuity and disaster recovery plans, and that these plans are regularly reviewed and tested.
Look at the plans that your suppliers have in place. What sort of incidents do they cover? Are they focused solely on IT systems, or do they deal with availability of staff, premises and goods? Have you checked whether the plan is fit for purpose? Often, a supplier's plan will be generic, rather than specific to the needs of a particular customer.
Do your suppliers have in place systems to enable staff to work remotely? Do those systems work?
Business continuity also means looking at your wider supply chain arrangements. Is your business dependent upon a single supplier or source for any goods or services? Can you put in place alternative suppliers or does your contract contain exclusivity provisions? Are you at risk that your suppliers focus on other customers at your expense?
Now is the time to check this and think about what can be done to mitigate any risks that are identified.
Additional Contractual Consequences
COVID-19 may impact on your commercial contracts in other ways:
- Change of Law: Change of law clauses may be invoked in the event of national governments taking legislative measures to combat the outbreak rendering the performance of some contracts illegal/impossible. Understand what your key contracts say, so you can assess the risk.
- Limitation and Exclusion: in the absence of force majeure/change of law clauses, suppliers may look to avoid liability by relying on limitation and exclusion of liability clauses. What do your contracts say about loss of business and revenue? The construction of these clauses is extremely important when seeking to rely on them.
- Price Adjustment: COVID-19 may lead to an increase in costs to suppliers. Suppliers may therefore seek to invoke price adjustment clauses or mechanisms to renegotiate the price for the supply. Even if there is no formal mechanism, organisations may find that they have to choose between agreeing a temporary change in prices (to cover increased costs to the supplier) or the supplier claiming relief under force majeure.
Insurance
Businesses should also review their insurance to determine whether their current policies provide for loss incurred from the disruption caused by COVID-19. The insurance industry has already flagged that business interruption insurance may not cover disruption caused by COVID-19.
It is important to review each policy to understand any additional requirements such as an obligation to notify the insurer of loss within a specific time limit or having to take steps to mitigate any loss.
5 Step-Plan
With disruption to business seeming increasingly inevitable, organisations need to take action now to identify and mitigate risks to their business.
Here are our key recommendations:
- Review - review your key contractual relationships to understand whether COVID-19 may have an impact on you or your supplier's ability to perform.
- Assess - assess your internal disaster recovery and business continuity procedures and supply chain resilience and how these interact with those of your suppliers.
- Check - where your suppliers are required to maintain business continuity procedures check that these are in place, have been stress tested, and are fit for purpose.
- Plan - consider what action you need to mitigate the risk to your organisation.
- Monitor - continue to monitor the impact of COVID-19 and keep your plans under review.
To discuss how COVID-19 may affect your supply chain and commercial contracts, the risks to your organisation, and the steps that you can take to mitigate those risks, please get in touch with me or your usual Brodies contact.
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