Perspectives

COVID-19 and commercial contracts

Legal considerations

The COVID-19 pandemic and the government measures put in place to contain the spread of the virus have an increasingly disruptive effect on supply chains and the economy, as well as contractual obligations. Deloitte Legal can help organisations in assessing and limiting their risks and liabilities in commercial contracts (B2B and B2C).

Managing obligations

The disruption of the pandemic has resulted in many companies being (temporarily) unable to perform their contractual obligations, and in many cases, this inability has a domino effect affecting the entire contractual chain. 

Deloitte Legal advises and assists clients in relation to the failure to comply with contractual obligations in general and the impact of COVID-19 on new contracts to be concluded (protection and liability). We also offer guidance on obligations under consumer and market practices regulations in light of the current crisis. 

Our services include contract scans; contract renegotiation and redrafting; advice, assistance and drafting of new contracts; litigation and dispute resolution.

Contract Lifecycle Management (CLM)

This crisis has highlighted that many organisations struggle with identifying impacted contracts and clauses, making it impossible to take quick and informed decisions to tackle the consequences of COVID-19.

Intelligent CLM provides visibility into an organisation’s contract population to instill trust among its stakeholders, secure it against emerging risks, and even make the organisation more resilient against events like COVID-19 now and in the future.

Deloitte Legal advises and assists clients in setting up CLM solutions. Our services include drafting of templates and standard clause libraries, defining playbooks and streamlined contracting processes.

Review contract stipulations

When unable to perform or confronted with force majeure notifications by suppliers or other contracting parties, companies should review their supply contracts and other contractual relationships. They should focus on (i) the applicable law, and (ii) the exact content and wording of the force majeure, material adverse change and liability clauses, as well as notification requirements, if any, with the aim of having a clear view on the risk allocation between the parties.

Deloitte Legal can help organisations assess the consequences of late performance or non-performance due to COVID-19 under liability clauses, force majeure clauses, MAC clauses, etc.

Force Majeure

In Belgium, force majeure is not strictly defined in the Civil Code and has been further clarified in jurisprudence and legal doctrine. In short, a force majeure event must be unforeseeable, outside of the control of a party rendering the performance of its obligations impossible (not merely more onerous or more difficult).

If all conditions are met for such a force majeure event, either the performance of the obligation is suspended (temporary impossibility to perform) or the performing party is released from its obligation to perform (if the force majeure event is definitive/final). This definition of force majeure and its effects can however be amended by contract (and is recommended). 

Whether or not the (consequences of) COVID-19 fall under a force majeure clause (or in lack thereof under the legal definition of force majeure), will strongly depend on the particularities of each individual case. 

If performance is (temporarily) impossible due to an act of government, this would typically be considered a force majeure event (unless this was foreseeable at the moment of conclusion of the agreement). If a contract covers ‘(health) epidemic, pandemic’ and all other (legal and/or contractual) conditions are met, the COVID-19 pandemic can be considered a force majeure event. On the other hand, price increases or difficulties in the procurement of raw materials/products can usually not be considered a force majeure event. It is also important to note that a force majeure event in respect of a subcontractor/supplier may not always qualify as force majeure in the relationship with a customer.

We can help organisations implement rapid actions to address current and future risks and uncertainties.

Material Adverse Change (MAC)

MAC clauses allow a party to a contract to withdraw from a transaction (or to renegotiate part of the contract) if an event materially reducing the profitability of the transaction occurs after the signing of the initial commitment.

Belgian law does not provide a definition and thus the contract must expressly foresee a MAC clause in order to invoke it.

To assess whether or not a MAC clause applies to the COVID-19 pandemic and/or to governmental measures, it is necessary to analyse the terms and conditions of the clause. Which events trigger its application? Are there financial thresholds, etc.? 

Belgian courts will, depending on the level of detail of the MAC clause, have a (wide) discretion in applying and interpreting such a clause and will take into account good faith, absence of abuse of right, etc.

Review insurance policies

Exclusions of insurance coverage might apply and an organisation’s insurer might refuse coverage. We can help organisations assess such refusals and, if possible, assist in demonstrating that coverage does apply.

With both the measures to limit the spread of the virus and the uncertainty it has created impacting businesses, it is imperative that they are aware of the legal considerations of failing to meet contractual obligations to protect their bottom line.

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