How Commercial Contracts Could Change in COVID-19 Era

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How Commercial Contracts Could Change in COVID-19 Era

COVID-19 pandemic has disrupted traditional lines of business across the globe. Companies are learning to adapt to new business lines because traditional lines and businesses have become either impossible to continue or redundant in the market. To protect their interests, companies need to pursue novel engagements, and for that, they need to enter into agreements. These agreements will help accomplish the goals with all the stakeholders involved in a business.

But with the changing economic scenario and the threat of an economic recession, it is important to wade past the long times in contract execution. When time is of essence and speed could save more than one life, parties must find ways to effect contracts and move ahead with implementing projects swiftly. Naturally, this shouldn’t come at the expense of personal interests. Some ways we can envisage that the contracts would change are.

Structure for Short-Terms

With the uncertainty dangling in the air, it is difficult to predict when performance under any contract could become impossible. Rather than gamble with that uncertainty, parties could rely on short term contracts with each major contract split into several parts. The idea is to minimize the risk in case honoring obligations becomes impossible. Dividing contracts into the manageable segments can help in focussing on what the parties need to be done immediately. One way we envisage that contracts will change is in the form of a marked shift towards shorter terms.

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Rely on Riders

If the parties have committed to working on a project in the long-run, they could rely on rider contracts to ride the uncertainty. Parties could structure high-level contracts that focus on key and critical elements right away. The less critical elements could be engaged in rider contracts with the provision that they would be merged with the parent document upon the execution of those rider contracts. This will provide the parties with an option to terminate and exit when convenient. This will help the parties in protecting their key interests at the moment while relegating less important terms to a later-date negotiation. 

Keep the Terms Flexible

Time is of the essence, and parties need to implement projects as quickly as they can. The obvious solution is to employ a contract whose terms are flexible. The idea of ‘flexible’ here is blurry. Parties could include flexible renewal clauses without committing to long-term work. They could also include easy termination clauses to ensure they get out before it’s too late. If the working relationship proves fruitful and positive, the parties could decide on continuing the engagement. Either way, keep the contracts flexible to modification.

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Force Majeure Clause

Force Majeure clauses have historically included acts of God, terrorism, war, incapacity to work, strikes, or the likes. Slowly, after SARS, MERS, and Global Financial Crisis, force majeure clauses have started, including those terms as well. It is unlikely that existing force majeure clauses would include incapacity due to COVID-19. If you’re entering into new contracts, you could modify force majeure clauses to include a pandemic. Since the possibility of a pandemic can’t be felt until it’s too late, it is always advisable to include these terms in your agreement.

Insurance

When considering changes to a force majeure clause, parties should consider whether they would be better off with an insurance clause. It is always advisable to assess the potential damage a pandemic could cause and whether those losses could be insured. But, there’s one potential issue here. Parties must examine the policies to confirm the coverage so that insurance companies don’t back down at the last moment and refuse to release the insurance award. When examining policies, clients should focus on the duration that the policy covers and the monetary value it covers. The policy should also be simple enough so that the carrier does not deny coverage.

While it is u-nlikely that existing policies cover the loss due to the pandemic, it is worthwhile to examine whether coverage is available given individual facts and circumstances. With so many things changing so fast, the insurance litigation scenario also can change. Parties should keep an eye on the litigations that arise concerning insurance because the tide could turn in favor of the litigants. These changes have the potential to impact business climate across the country significantly. 

Agree to Disagree on Tax Treatments

If the parties can’t agree on a common tax treatment for any revenues accrued from the contract, the contract should include provisions that allow the parties to treat the tax implications arising from the contract as they see fit. However, the same contract should also include provisions where the parties confirm that any risk arising from such treatment of tax shall be borne entirely by them without recourse to the terms of the agreement involving the other party. 

Conclusion

A lot of changing currently, and it is uncertain when things will return to normalcy. In times like that, drafting sound contracts is essential for the survival of the business. If you’re uncertain about how to proceed with drafting contracts, check out our bundle of agreement templates.