During a crisis or financial downturn, some businesses may find it challenging to perform their contractual obligations, despite their best intentions. The Covid-19 crisis has created the potential for a large number of contractual disputes as businesses face difficult questions in terms of how to comply with their contracts and deal with business partners who are unable to perform.
Take into account the following key considerations:
— Has your business explored whether electronic signatures are allowable for various types of contracts in the event that face-to-face meetings cannot be held?
— In the course of business, contracts may need to be signed urgently. Significant contracts may require approval from key employees. However, travel restrictions and the inability to conduct in-person meetings can potentially cause delays. Ensure continuity of contract approvals and consider electronic signing options.
— Does your company understand what constitutes a force majeure event in local jurisdictions and how such events impact contractual obligations?
— A crisis or economic downturn may disrupt supply chains, trigger cancellations and generally dampen the economic mood for investment and spending. Businesses under financial pressure may face challenges when trying to uphold their contracts. If they determine that continued performance is not possible, they may try to look for ways to suspend or terminate their obligations.
— Commercial contracts often have a force majeure clause to cover what happens during extreme situations. During a crisis, examine the exact wordings of contracts as well as legal precedent in relevant jurisdictions to determine what does and does not constitute force majeure. If force majeure applies, carefully weigh the impact of this option against all the circumstances.
— Has your business considered how potential breaches of contract by business partners will affect the business’s own obligations?
— Despite the best intentions of business partners, it is possible that some businesses will fail to meet their obligations under a contract and therefore technically be in breach. This is not an ideal situation for either party; however, it is important to remain proactive and practical in finding a way out, and not necessarily resort to legal remedies immediately.
— When a business believes that it may be unable to perform a contract, apart from considering whether force majeure would apply, it should also consider when it is realistically likely that it can return to compliance.
— Review the contract to assess the impact on the business due to non-performance. You should also communicate early with the other party on a good faith basis in an attempt to resolve the situation and consider whether part of the contract may still be performed. Consider whether failure of one contract may in turn affect the company’s performance under other contracts.
— Understand the meanings of contractual time limits and understand the contract terms. Proactive engagement with other contracting parties before a time limit is breached can lead to improved negotiated outcomes compared to merely waiting for it to expire, especially for financing arrangements.
— Has your business fully explored how good faith negotiations with business partners on contract terms can reduce the likelihood of disputes in the event of a crisis?
— Good faith negotiation is always preferable to formal dispute resolution. It is important to preserve long-term business relationships and recognise that all businesses will face difficulties during a challenging environment or economic downturn. If there are signs that the relationship is breaking down, businesses should consider whether they need professional advice about their legal rights to better inform discussions with business partners.