Review and Execution of Contracts During the Stay-At-Home Period
Frank C. Sutherland | 04.13.20
All of us have been responding to the challenges presented by the novel Coronavirus (COVID-19) in some form or manner within our personal lives. Many, if not most, of us are also making significant adjustments within the context of our professional lives, with many business owners and managers contemplating steps to help ensure the survival of their businesses. It should go without saying that many businesses have been reviewing existing contracts and arrangements with vendors, suppliers, customers, landlords, and subcontractors to determine the respective rights of the parties. Less obvious, however, is the need to ensure that contracts a business enters into for future goods, services, or other benefits need to contain terms and conditions appropriate to the time in which we now live.
Many businesses will not contemplate entering into contracts for weeks or months. Other business owners and managers face the prospect of entering into contracts at this time or in the very near future. It is under these circumstances that business owners and managers need to ensure that contract terms protect a business’ interests going forward. For example, a standard purchase order that has been used for many years with regular and new customers alike may require updating to take into account the continuing economic risks associated with COVID-19. Non-standard contracts for the purchase and sale of services, goods, inventory, equipment, real estate, and almost any other tangible or intangible property will almost certainly involve the consideration of factors that may not have been necessary to consider prior to the COVID-19 pandemic. Thus, while business owners and managers are already reviewing existing contract terms, which may or may not take into account risks associated with COVID-19, certainly no one will want to proceed with the execution of a new contract that does not address risks associated with this pandemic.
While some business owners and managers may have the option of postponing the execution of new contracts during this time of uncertainty, many do not. Businesses identified as essential businesses, many of which play critical roles to our health, safety, and economy, necessarily continue to engage in purchases and deliveries of goods, services, and other benefits at an equal or increased rate than just a month ago. In addition, many businesses rely upon long lead-time purchases in order to manufacture goods or deliver services, thus requiring the entry into contracts at this time. Other businesses may have to execute contracts now in order to be poised to resume business following a time of shutdown or reduced business operations. Suffice it to say that many businesses must and will be entering into contracts during the stay-at-home period.
Contract clauses that will effectively protect the interests of a business are likely to vary widely from one industry or market segment to the next. The determination of appropriate protections requires a specific analysis of the context within which a business operates. In some cases, especially where a business is the party required to deliver services or goods, businesses may wish to include a force majeure clause in an agreement, which specifically calls out risks associated with COVID-19. Force majeure clauses generally provide grounds to justify a party’s non-performance when an event outside the parties’ expectation and control prevents a party from fulfilling its contractual obligations. (A full discussion of the nature and enforceability of force majeure clauses is beyond the scope of this blog post.) In many cases, conditions precedent or contract contingencies that are drafted to address the specific interests of one party, but not necessarily the other party, may be in order. Once again, the nature of such conditions are likely to be determined by the specific circumstances relevant to a given contract. Moreover, much like more familiar contingencies such as a financing contingency, terms are likely to be the subject of negotiations between the parties. In any event, the identification and drafting of appropriate contract protections are issues you will wish to address in detail with your attorney.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.