Covid 19 lessons for commercial contracts – Dukesons Business Law – Business Lawyer – Commercial Lawyer – Contract Lawyer

September 2020

This Blog isn't legal advice – if you need legal advice on any business law or commercial law issue, please contact me. I'm business lawyer (commercial lawyer) in Auckland who provides advice on a wide range of business law issues including contract law.

Many forms of contract contain some sort of force majeure (FM) clause and some contain material adverse event (MAE) clauses. Some FM clauses are short and simple and therefore, are of limited application. One lesson from COVID 19 is that going forward, parties need to consider in more detail what should be in their contract to deal with unexpected events that are beyond their control. Contractual clauses are likely to be more certain to rely on than the common law doctrine of frustration (which applies in very limited circumstances).

It will depend on who has the bargaining power as to what clauses may be included in the contract. Sometimes, a contract will be on a take it or leave it basis. (That will change to some degree when the proposed changes to the Fair Trading Act are enacted, which will apply the current unfair contract terms regime of the FTA to “small trade contracts”.)

Supply Contracts

Supply contracts are a good example to consider. They may or may not be called supply contracts. For example, supply pursuant to agreed terms of trade is a type of supply contract. As another example, distribution contracts often have a supply contract component.

The supplier has an interest in not being liable for delays or failures in supply for reasons beyond their control. It’s common to provide for no liability for delay and often, there’s a form of FM clause. Suppliers need to consider whether their existing provisions go far enough. Is there also a need for a MAE clause (basically confers a right of termination in where a MAE occurs)?

The purchaser has an interest in not being required to buy where its plans are affected for reasons beyond their control. Often, FM clauses, especially the simpler versions, are expressed to be for the benefit of both parties. A purchaser should consider whether they should bargain for a tailored FM clause and/or MAE clause.

There are of course other possibilities that a purchaser should consider. Examples include:

  • seek to order on a consignment basis or to have a right to return paid for stock that is slow moving;
  • whether or not they can get advantageous clauses included in the contract, seek assurances from the supplier that the supplier can get supplies from alternative sources – how can the supplier assure continuity? Continuity may not be possible in relation to a major event like COVID 19;
  • bargain for a clause requiring the supplier to distribute its products on a pro rata basis among all its customers, or even to prioritise the purchaser;
  • bargain for a clause allowing termination on short notice for delay or failure to supply;
  • bargain for a liquidated damages clause for delay or failure to supply.

Leases of Commercial Premises

The clauses in the Auckland District Law Society form of lease have been well publicised. A number of my clients approached me early on during the lockdowns for advice as to whether they could rely on these clauses and to what extent. Most other forms of leases didn’t have those types of clauses. Going forward, tenants will want to bargain for the inclusion of similar clauses.

Employment Agreements

Many employment agreements contain FM clauses. Often, the clauses are in simple form and only take things so far.

Going forward, employers should consider having more extensive clauses, which spell out in more detail what steps employers can take when events beyond their control impact on their businesses. Especially where employees don’t, as a rule, work from home, there’s a need to have provisions that deal with the need for employees to work from home, including as to health and safety, remote access to computer systems, and performance management.

Commercial Contracts Generally

Parties really do need to take time to think about how a significant “external” event may affect their business and specifically, how it may affect their contractual obligations. Where there’s bargaining power, parties should take such steps as they can to protect their position or limit their liability or loss in such circumstances.

Insurance

I’m not an insurance lawyer and don’t give any advice on insurance issues. However, I can refer to publications that insurance lawyers have produced.

Parties should consider what insurance they may be able to take out as a result of not being able to complete contracts due to FM or a MAE. It would seem that business interruption insurance (BI) may not cover the situation. The information that I have gleaned from other sources is that:

  • The scope of cover is typically limited by reference to the cause of the interruption. Policies for the most part are unlikely to assist a party suffering loss due to a pandemic. Typically, policies are linked to physical property or material damage insurance policies.
  • While some BI policies cover losses caused by events not involving damage to insured property, the extent of cover is usually considerably more limited than for BI losses resulting from physical damage. Policies won’t usually cover events like COVID 19 because they generally exclude losses caused by notifiable diseases under the Biosecurity Act 1993, or infectious diseases notifiable under the Health Act 1956.

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