COVID-19 outbreak and its consequences for commercial contracts

The Coronavirus disease (Covid-19) outbreak and its consequences for commercial contracts

The World Health Organization characterises Covid-19 as a pandemic. Schools and companies have closed their doors or work with a skeleton staff. In this way an attempt is made to prevent a further spread of Covid-19.

At the same time, it is evident that the measures that have been taken and will be taken to prevent a further spread of Covid-19 will have an impact on commercial contracts, such as sales, distribution, services and lease contracts. Hereafter, we identify some key questions that may arise.

1. What if a party defaults under the contract?

It could happen that a party fails to perform its contractual obligations because of measures that have been taken against a further spread of Covid-19. For example, a party could fail to deliver products in accordance with the terms of the contract or fail to provide the agreed upon services. While the current situation may grant certain legal defences to a defaulting party, it cannot be excluded upfront that damages and/or contractually agreed upon penalties, if any, may be due or could be claimed. In certain circumstances the contract may also be rescinded. Because most matters of contract law are at the free disposition of the parties, the terms of the contract are in the end decisive.

2. Can a contract be cancelled free of charge?

It is also possible that a party intends to cancel the contract in connection with the Coronavirus disease outbreak. Then the question arises whether this can be done free of charge. The answer to this question depends on the precise circumstances of the case and the agreement of the parties.

3. What if a contractual counterparty fails to comply with its contractual payment obligations?

It is expected that a substantial number of parties will face liquidity problems due to the current Coronavirus disease outbreak. If one foresees that a contractual counterparty may not be able to pay outstanding or future invoices, prompt action is recommended. As far as legally possible, one may consider the rescission of pending contracts or the stay of deliveries of products or services. It may also be useful to investigate whether securities for payment can be negotiated or whether other protective measures are opportune.

4. Is there an insurance policy?

If a party has insurance, it is recommended to verify whether there is a right to a benefit from this insurance. In case there may be a right to a benefit, prompt action is required, because strict time limits are usually included in the insurance.

5. Is COVID19 a reason not to pay rent or to terminate the lease agreement?

Can tenants be forced to make use of the premises if the public authorities have ordered to close the premises? Can tenants defer payment because they have no income? These and other questions are very pressing at this moment. The answers differ, depending on the lease agreement and the circumstances of the case.

6. What if liquidity problems are imminent?

If a party foresees that it may encounter liquidity problems, it is recommended to undertake prompt action. Deferral of payment may be possible, additional financing may be available or perhaps a government scheme may be applied for. That said, the extent and form of government support is still unclear to date.

Determine your rights and obligations

While it may not be your priority yet, it is important to check your contracts and determine your contractual rights and obligations. We are happy to think along with you, provide you with clear advice and help you realise commercially sensible and practical solutions. Would you like to know more or discuss your situation, please contact one of the contacts listed.