COVID-19, or more commonly known as the coronavirus, has caused unprecedented uncertainty throughout the business world.
The UK Government has announced a variety of measures to tackle the coronavirus outbreak. However, there still remains many legal grey areas and unanswerable questions.
As a business owner attempting to tackle these, you should be mindful of some the following points to mitigate the risk that the coronavirus may have on your commercial and corporate transactions.
Review your Terms and Conditions and/or Contractual Agreements
A ‘force majeure’ clause within a commercial contract, if triggered, can suspend, and possibly end, the performance of obligations where a party is prevented from performing by events outside its control. For more information on these specific clauses and the impact, please read our article on Force Majeure.
Material Adverse Changes
Material Adverse Change (MAC) provisions may allow a party to terminate a contract if there is a MAC. These clauses sometimes appear in high-value contracts (especially mergers and acquisitions) or long term agreements. MAC clauses are often negotiated between the parties and can be very fact-specific. It’s possible for MAC provisions to be negotiated which expressly addresses issues arising out of the coronavirus outbreak.
If you are selling your business, you should ask a specialist corporate lawyer to review the sale agreement. You might be able to prevent the buyer from being able to back out of the deal by excluding issues arising out the coronavirus outbreak.
For example, a person who has contracted to buy a company might claim that they are released from proceeding with the purchase if the target company suffers a MAC as a result of the coronavirus outbreak.
Indemnities, Representations and Warranties
Corporate and commercial agreements often include warranties, indemnities and/or representations. In summary:
- A warranty is a contractual promise and if breached can give rise to a claim for breach of damages.
- Indemnities are contractual obligations to compensate someone for the losses they incur in connection with a specified event.
- A representation is a statement which if relied upon may give rise to damages in a misrepresentation claim.
Damages for misrepresentation are assessed on a different basis to damages for a breach of warranty. It can be to the advantage of the party claiming damages to be able to choose a claim for breach of warranty or misrepresentation.
Drafting new coronavirus specific warranties, indemnities, representations in light of the outbreak needs careful attention to reflect the interests of the relevant party. Existing commercial contracts should also be reviewed again as some of their provisions may have now become more onerous or even void, incorrect or untrue.
This kind of provision states that the contract/agreement will only come into force once a particular event or “condition” is met. Where a condition precedent is included within a contract careful you should consider whether or not the condition can be satisfied in light of the coronavirus outbreak.
A condition which might have been relatively easy to satisfy before the coronavirus outbreak may now be difficult or even impossible to meet. For example, if work from home policies have been implemented it may no longer be practicable to satisfy a condition that certain documents or data will only be held at a specified location.
Not all agreements will give a party the right to terminate so it may be worth considering inserting one that is specific to coronavirus. For example, a party to a contract might want the right to terminate a contract if a specified number of locations or facilities have been closed due to the virus. This will require careful drafting and consideration of the practical and commercial circumstances.
Practical Points to Consider
- Have your contracts and agreements reviewed to see what provisions, if any, need amending or re-negotiating;
- Consider whether going through with a particular transaction is economically viable and whether delaying signing may be more advantageous for your business;
- Negotiate with your lenders and agents regarding funding and financing so that can assess the next steps to take.
It is a very uncertain time for us all, and removing all risks is impossible, but that does not mean we cannot try to manage the position to reduce the risk from a legal perspective.
Posted on March 20, 2020