Covid-19 and Contractual Relationships – Issues to Consider

Covid-19 affects people and businesses globally and may impact the ability to fulfil various contractual obligations. The situation is rapidly changing, and it is important to be prepared and flexible.

We advise our customers to review their existing contracts with suppliers and customers to identify the major risks and to find ways to minimize the negative impacts on the business. It is important to have an end‑to‑end mind-set from the beginning, and to prepare for action both as a customer and as a supplier. Moreover, any new contracts entered into under the current circumstances, or RFQs, RFIs or similar documents being issued, need to address the actual and potential effects of the current, and future, situation relating to covid-19, inter alia by including appropriate clauses on relief and/or disclaimer of liability etc due to such circumstances.

Please find below some of the issues to consider, primarily focused on the industrial sector, but many issues are relevant also for other sectors.

Acting as a Customer

Strategic Concerns – Continuity of Supply

• Where are the suppliers geographically located?
• Have your suppliers provided any information relating to delivery problems or other disturbances? Is there reason to believe that such problems may occur?
• Are there alternative sources of supply? Is it possible to swap an affected supplier? What are the costs and other impacts of doing so?
• If there are no alternative suppliers, is there a possibility to re-design the solution? What would be the time frame, cost and business impact?
• How important is on-time delivery? What are the effects of delayed or cancelled deliveries?
• What is your leverage towards a specific supplier? What actions can be taken to ensure that you are a prioritized customer when the production and deliveries pick up again?
• Make sure to document losses and other damages suffered due to the supplier not fulfilling the contract obligations.
• Review your insurance coverage.

Contractual Issues

• How is the contractual situation with your suppliers, what protection do the relevant contracts provide? Make sure to locate and review all supplier contracts at an early stage.
• Do the contracts contain force majeure clauses? How are those clauses drafted? What circumstances constitute a force majeure event? How should the parties act in case of a force majeure event? Reporting obligations (timing and format requirements)? Obligations to mitigate loss? Possibilities to terminate the contract after a certain period of force majeure?
• Which country’s legislation is governing the contract? What are the rules under applicable law? This becomes particularly important in the absence of wording in the contract (e.g. on force majeure).
• What does the contract stipulate regarding delays in delivery? Liquidated damages for delays? Termination rights?
• What other rights of compensation does the contract provide? What limitations of liability apply?
• What are your possibilities to withhold payments under the contract?
• Does the contract contain exclusivity clauses?

Practical Issues

• If you have received information on supply issues, what kind of information has been provided and at what stage? Is there a need to request further information?
• If the supplier claims force majeure, the causal link between the alleged force majeure event and the supply problem should be specified in sufficient detail.
• What measures has the supplier taken to limit the impact? When is the supplier able to deliver?  
• In general, consider carefully how you communicate with the supplier. Keep a good relation – you will benefit from receiving relevant information promptly to be able to limit the effects at your end. However, you should be careful not to confirm the supplier’s view on the situation, including the actual existence of a force majeure event (and thus a relief from performance). If you do not agree with the supplier’s view, you should state that in writing. Moreover, be careful regarding different types of general “force majeure-certificates”, each situation must be individually assessed.
• Bear in mind that the total impact on your business may take some time to fully overview. Monitor closely how your customers, as well as the industry in general, are acting. If you receive claims from your customers, it is important that you ensure, as much as possibility, the ability to pass on at least a portion of the liability towards your supplier.
• Create channels to enable a frequent communication with the supplier. Avoid unnecessary negative impact on the relation, as the contractual relationship will hopefully continue for many years.
• Make sure to take the prevailing situation into account if you enter into contracts with new suppliers and to thoroughly review relevant clauses.

Acting as a Supplier

Strategic Concerns

• Review where (e.g. which customers, geographical regions, projects) there is a risk of not being able to fulfil the contractual obligations.
• Rank the risks. What customers/projects have the highest risk exposure? Which customers/projects are most important to secure?
• Review also any supplier aspects to get the full (end-to-end) view. How can you re-prioritize? Which customers are most impacted by delayed deliveries? What are the effects of delayed/cancelled deliveries? What are the risks and how are they allocated?
• Make sure to document the situation and collect evidence regarding the circumstances that prevents your fulfilment of the contract.
• Review your insurance coverage.
• Prepare to resume your performance as soon as possible.

Contractual Issues

• Review the contractual situation for the affected customers. Make sure to locate and review all contracts at an early stage.
• Do the contracts contain force majeure clauses? How are those clauses drafted? What circumstances constitute a force majeure event? Does the clause provide examples of events, or just refer to “events outside a party’s control”? How should the parties act in case of a force majeure event? Reporting obligations (timing and format requirements)?  
• Which country’s legislation is governing the contract? What are the rules under applicable law? This becomes particularly important in the absence of wording in the contract (e.g. on force majeure).
• Are there other possibilities, according to the contract or under applicable law, of relief from the obligation to perform even though the situation would not be considered as a force majeure event?
• Is it possible to reject new, or cancel pending, orders, or to reduce quantities?
• What does the contract stipulate regarding delays in delivery? Liquidated damages for delays? Termination rights? Are there any deadlines or timing concerns?
• What other rights of compensation does the contract provide? What limitations of liability apply?
• Does the customer have a right to withhold payments?
• Are there any deadlines or timing concerns relating to when to notify the customers of obstructing circumstances?
• Does the contract regulate how messages should be delivered (to whom and in what form)?

Practical Issues

• Provide the affected customers with accurate information in writing at an early stage, however, avoid going into liability issues.
• Be realistic and prudent when assessing and communicating new delivery times and include relevant conditions for meeting the new dates (e.g. that the delivery date is estimated based your receipt of deliveries from factories in China, which you have been informed will be take place at a certain time) and make sure to keep your customer updated in case of changes.
• Set up efficient information channels and a governance structure together with the customer to monitor the situation and its development. Frequent information makes it possible for the customer to limit its loss, and thus will limit your risk exposure. Make sure to update the information regularly.
• Fulfill such obligations under the contract which you are still able to fulfil (e.g. execute partial deliveries).
• Show the customer that you are working proactively to find solutions. Involve the customer in your work.
• Make sure to document all agreements with the customer in writing to avoid future discussions. Verbal agreements deviating from the contract wording will be difficult to prove if questioned later.
• Even though the contract wording may be strict, there is always the possibility to discuss and agree how to act in a certain situation. However, remember to always document in writing.
• Make sure to take the prevailing situation into account when you enter into contracts with new customers and to thoroughly review relevant clauses. Remember to also take the situation into account when providing responses to RFIs/RFQs and similar requests from customers, i.e. to include appropriate liability disclaimers for effects related to covid-19 etc.
• Review your existing standard contracts. Is there a need to make changes in the clauses referring to force majeure, hardship etc.