What’s the impact of the Coronavirus on your commercial contracts? (Lydian)
Publication date: 02/03/2020
1. Given the unprecedented and global scope of t7he Coronavirus, it is clear that performance under many commercial contracts will be delayed, interrupted, renegotiated or even cancelled. Reasons for this vary from lack of raw manufacturing materials to quarantine measurements imposed by national bodies or import / export difficulties at customs.
2. At what point does the Corona virus allow a contracting party to deviate from the existing contract and agreed (delivery) terms and conditions? At what point can a company faced with non-performance take legal actions against the defaulting party and is it wise to do so knowing that the defaulting party is most likely not willingly doing so?
3. To answer these questions, it is important to determine if the Coronavirus will be considered as an act of God (“Force Majeure event”) under Belgian law.
For this legal qualification as act of God, it must concern an unforeseeable and unavoidable event (which occurs after the conclusion of the commercial contract) which is not the result of contracting parties’ own action(s) and which makes it impossible for the defaulting party to perform a contractual obligation.
In case of an act of God, the defaulting party is (temporarily or permanently, depending on the wording of the contract / circumstances) released from its performance and cannot be held liable for related damages suffered by the other contracting party.
If your commercial contract does not include an act of God provision or if the act of God provision does not explicitly list events such as pandemics or epidemics (or possibly quarantine measurements), it will depend on the particular circumstances of the case if the defaulting party can successfully invoke act of God to legitimize its own default.
If your commercial contract does include such event as an act of God, please check immediately if there is an obligation for the defaulting party to notify its contracting party within a certain time limit that it relies on the act of God. Contractual provisions often indeed require that the defaulting party seeking to rely on an act of God provide formal written notice from the moment this party becomes aware of the potential event.
If your company decides to rely on act of God, please also ensure sufficient documentary evidence by documenting all evidence pertaining to the event and its direct causal link to your company’s inability to perform its obligation(s).
If your company receives such formal written notice, please check if the procedure stipulated in the act of God provision has been followed and if the defaulting party is not using the Coronavirus as a mere excuse to escape liability for a contractual default that would have occurred in any event.
Invoking an act of God is not a decision to be taken lightly as the numerous immediate and long-term consequences and implications of such a decision will most definitely have for your contracting party and your future business relationship.
Hence, it might be worth taking your time in attempting to renegotiate the existing commercial contract or important parts thereof in light of the Coronavirus outbreak.
4. The (consequences) of the Coronavirus outbreak might also constitute a form a hardship. This is when an unforeseen event occurs that fundamentally alters the contractual equilibrium resulting in an excessive (e.g. financial) burden being place on one of the contracting parties.
Under Belgian law, hardship provisions that stipulate the consequences in the event of hardship are unfortunately not automatically included in a commercial contract. Without such provision, parties hence bear the risks of this unforeseen event.
Please check if your commercial contract includes such hardship provision and if there is a time limit to invoke this provision. Again, if your company decides to rely on hardship, please ensure sufficient documentary evidence by documenting all evidence pertaining to the event and its direct causal link to your company’s more burdensome performance of its obligation(s).
5. If your company faces a damage (compensation) claim for late delivery or for default against any other contractual obligation, please check to which extent your company’s liability for indirect and consequential damages is excluded in the existing commercial contract.
As consequential damages often represent a higher value as direct damages, it is advisable to exclude liability for these damages in commercial contracts that your company is presently concluding or will conclude in the near future.
6. For any commercial contracts that are financed by means of debt financing, borrowers should review the terms of these credit agreements to verify whether the delay, interruption, or cancellation of the underlying commercial contract will be an event of default thereunder that could trigger the obligation to immediately repay the relevant loan. If this is the case, we would suggest to timely discuss this with the lenders to see whether a waiver could be requested in this respect. In addition, to the extent that the Coronavirus outbreak has an impact on the financials of the company, it should be verified that no financial covenants under the credit agreement will be breached. Also therefore waivers could be requested so that this does not result in an event of default accelerating the loan.