Home Knowledge COVID-19 and its Effect on Commercial Contracts

COVID-19 and its Effect on Commercial Contracts

The unfolding COVID-19 pandemic is having widespread effects on business operations in Ireland.  As a result, many businesses need to take a closer look at their obligations under key contracts and consider whether the performance of their obligations may be impacted.

How can COVID-19 impact on the performance of contract obligations?

The COVID-19 outbreak has resulted in uncertain times for businesses and may make obligations under a contract more difficult or impossible to comply with, which could lead to adverse financial implications. Commercial contracts will need to be reviewed to determine how these may be affected.  Each contract will have its own specific issues but some of the key clauses to consider include:

  • Obligations to provide goods and services 
    Companies operating on a national or global scale may face material supply chain challenges, particularly in respect of operations in some of the worst affected areas or sectors. This can lead to disruption in the effective provision of goods and services under the contract. Companies may also struggle to meet reporting obligations due to the impact on staffing and business operations.
  • Payment terms
    Cash flow is a potential concern. Parties might seek to negotiate extended payment periods or seek credit lines in response to the upheaval.  When seeking a longer term for payment, or varying payment conditions, these changes should be properly documented between the parties including how the changes are to take effect and for how long. 
  • Delivery of goods and services
    Effective delivery can depend on the location of key customers or suppliers. Terms requiring the goods or services to be provided from or to a specified location or via a designated delivery method might need to be adjusted to address new business realities such as office closures and remote working as well as transport restrictions.
  • Service levels
    Due to many governments effectively restricting business operations and service delays caused by employees remotely working or self-isolating, agreed service levels may need to be reduced or waived for a period. This prevents a breach of the supplier’s obligations where service demands cannot be met.
  • Key personnel
    Certain key personnel might have designated responsibilities for managing commercial relationships or overseeing service operations under the contract. For these roles and responsibilities to be maintained in the current climate alternative arrangements may need to be agreed between the parties to reallocate or suspend these responsibilities. 

What contractual provisions can mitigate the effects of COVID-19?

When the issues have been identified, parties may seek to use relevant contractual provisions to effect changes to the contractual relationship to ensure continuity of operations.  

  • Variation of Contractual Terms
    In most cases, it is likely that the parties will consult with each other and work together to agree suitable alternative measures to allow the contract obligations to be fulfilled.  The contract might set out the procedure to vary the contract and any requirements for the variation. It is advisable that any changes are made in writing, signed by both parties and last only for as long as is necessary.  Parties may also agree to schedule review meetings regularly to monitor the effects of the changing situation.
  • Dispute Resolution
    These are challenging times for all businesses and commercial discussions should be held between the parties before any change is agreed to the contractual terms.  Where issues are proving problematic, or where there is conflict over the effects of COVID-19 on the contractual terms (e.g. has there been an allegation of breach), parties should look to the escalation of these issues through relevant dispute resolution clauses.
  • Material Adverse Change
    The contract might provide for a situation which allows one party to avoid performance where there has been an unpredictable or unforeseen event (material adverse change) to its business. This term might potentially be invoked in the context of COVID-19 depending on the drafting of the clause and the circumstances.
  • Force Majeure
    Parties may wish to rely on the force majeure provisions within the contract to invoke the suspension of the performance of the affected party’s obligations. Further information on the applicability of and reliance on this provision can be found here.

    Some jurisdictions have declared COVID-19 as a force majeure event. At the present time, Ireland has not made a similar decision.

  • Frustration
    In the absence of remedies through express contractual provisions, parties may seek to rely on the doctrine of frustration to fully set the contract aside. This is a legal presumption implied into the contract. A contract may be held to be frustrated in a situation where, without default of either party, a contractual obligation is now incapable of being performed. 

    The frustrating event should not have been envisaged by the parties at the time the contract was concluded, and a court will interpret this strictly. Please note that provisions contained in the contract providing protection for a pandemic/epidemic may preclude the parties from claiming frustration. Further information on relying on the doctrine of frustration can be found here.

Practical Steps: Managing business relationships during these unprecedented, challenging times.

  1. Know your obligations under priority contracts and assess how these may be affected over the coming months;
  2. Engage with counterparties early on to discuss any changes to commercial arrangements;
  3. Keep a record of all discussions, agreed changes, cost implications, timescales and reviews. Any changes to the contractual terms should be agreed through an amendment to the contract. More information on concluding amendments or other agreements in light of COVID-19 restrictions, is available here; and
  4. Reflect on the fact that relationships with your contracting parties will continue into the future after the effects of COVID-19 have reduced or passed and good relations with such parties will be critical to your business longer term.  

We are available to advise businesses with any issues they face. Please contact Leo Moore, Michelle Clancy, Nicole Fitzpatrick or your William Fry contact with any queries. 

Our partners, associates and our support teams are available as usual to support your business. We also have a specific COVID-19 Hub to help you.

Contributed by Michelle Clancy, Nicole Fitzpatrick