- Force majeure (vis major) is not a universal answer to all complications brought by the ongoing COVID-19 pandemic. If you are considering applying force majeure, analyze the applicable contractual provisions in the context of the factual situation. Assess, whether there is a real and immediate causal link between the existing situation and the crisis caused by COVID-19. An incorrect (mostly subjective) assessment may have significant consequences. Consider all your steps from the perspective which you will be able to defend also in possible litigation cases. There is the same clear answer for both – the creditor who objects the application of force majeure and also the debtor claims protection under force majeure and this answer lies in an individual and thorough assessment of the contractual and factual aspects of the matter. Please note that without having a special provision (force majeure clause) agreed between the parties, an event of force majeure will not exempt parties from their duty to pay contractual penalties.
- Pay attention to liability arising from the failure to fulfill contractual obligations and other related claims. Be prepared to assess questions regarding the failure to fulfill contractual obligations, liability for damage, contractual penalties, and other possible sanction procedures in the upcoming weeks. There is no one general answer, but you should follow the next three basic rules. Firstly, treat the contracts individually and assess whether the statutory provisions or contractually agreed provisions apply. Secondly, the impossibility of fulfilling a particular obligation does not necessarily mean that other obligations cannot and should not be fulfilled. Thirdly, individual communication is crucial, for both – the creditor and the debtor. Keep in mind that too harsh enforcement, even from the creditor’s side may be in contradiction with the principle of fair trade and the debtor may, therefore, claim a certain degree of legal protection.
- Mitigation is key. With some contracts, the “legal perspective” can play only a secondary role. Sometimes, the most crucial step will be a timely notification made to the business partner about the impossibility to (further) fulfill a contractual obligation. Take steps that eliminate or reduce claims against you. Do not disregard or neglect any mitigation and prevention measures, even if you are in the position of a creditor. It is expected that a substantial amount of litigation cases in the future will be arising from non-compliance with the obligation to prevent imminent damage and related legal issues.
- Assess if you can request the change of the contract due to a substantial change in circumstances. The current situation does not constitute a basis for a generally accepted reason to claim price amendments or changes of contractual provisions per se. Identify remuneration provisions or so-called material adverse change clauses in contracts and make such claims only after analyzing them.
- Prepare for the fact that you will have to handle issues arising from contracts. The COVID-19 pandemic complicates the (timely) fulfillment of contractual obligations. Here, the solution lies in the details and specific parameters laid down in the relevant contract. Audit contracts and their wording so that you are ready to respond flexibly to emerging issues.
- Analyze the impacts of the COVID-19 pandemic on related contracts and relationships. Identify risky cross-default clauses and collaterals. From the perspective of entities offering collaterals, it is essential now to check if obligations are being fulfilled on time. Also, make sure to follow notification obligations and to keep all deadlines that are stipulated for debtors or entities offering collaterals. Such an administration process may be ultimately the key to the successful enforcement of collaterals.
- No one will be spared from re-negotiations of existing contracts. Make re-negotiations your tool for targeted changes or for achieving a better contractual position. Combine agreements on extensions of the maturity of receivables with changes of other outstanding issues such as acknowledgment of debt, the set-up of set-off mechanisms, tightening of supplier’s liability, collateral security, etc. Take hold of the situation and try to turn the existing negatives into an improvement of your contractual position. If some of the contractual relationships are affected by the COVID-19 pandemic in a way that causes them to lose their economic sense, make sure you identify them early on and choose the best procedure for their most cost-effective and timely termination. Do not act negligently when it comes to the form of the contract. Regardless of informal agreements made amid the COVID-19 pandemic, it always makes sense to come back to their formalization in the form of written amendments. The reality is that correctly or incorrectly agreed amendments will be the subject of many disputes following the aftermath of the COVID-19 pandemic.
- Learn from the situation and use your experience when drawing up new contracts. Evaluate the impacts of the COVID-19 pandemic, use to your benefit information on your business partners and information from your subcontractors. Actively communicate new issues with them. Adjust the issues that are currently under discussion in new contracts. Draft carefully and in detail liability clauses, consequences of unforeseen events and other questions to which it is difficult to find an answer to in your contracts or where you are not satisfied with the existing wording.
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