The impact of the novel coronavirus (COVID-19) outbreak has been widespread with implications for multiple sectors of the global economy. We set out below some practical steps businesses could take to assess potential upheaval and identify some implications of coronavirus for Dutch law contracts.
What practical steps can I take now?
Some practical steps that may be taken include the following:
- assess if your performance of contractual obligations may be affected and take reasonable steps to work around the identified risks or discuss them with your counterparty. Where you can perform some but not all of your contracts, think carefully about which contracts you prioritise, bearing in mind applicable laws and relevant contractual provisions;
- in a supply chain context, identify whether you are dealing with different laws applying to different points of the chain and what that means in relation to the overall performance of the contract. If your supply chain is exposed to the effects of the outbreak, line up fall-back options;
- consider whether your insurance policies cover the outbreak or its knock-on effects;
- assess what rights you have and what you need to do to protect them. For example, be aware of notice requirements which are preconditions to exercising a force majeure clause or insurance protection;
- keep a detailed record of how the consequences of the coronavirus outbreak are impacting your performance – this may be useful in later disputes. Consider carefully the text of any communication or record that is created working on the basis that what you write may be later scrutinised by the other party’s lawyers and by a court. Check effective dispute resolution provisions are in place;
- consider the longer-term relationship with your counterparties, and whether force majeure, excusable breach, frustration or the other principles discussed below might be used as leverage to negotiate a sensible commercial solution to current issues;
- consider other commercial and reputational risks that may arise from the outbreak, including HR/employment issues and the risk of counterparties becoming insolvent; and
- assess whether and how to communicate with counterparties pre-emptively to seek solutions to the issues raised.
How might coronavirus affect my contract?
Contracts may be affected by the legal and economic consequences of the outbreak, amid supply chain disruption, travel restrictions and turmoil across different markets. The first step is to review existing contracts and those being negotiated (including standard terms of business).
In current contracts, parties may struggle to perform them properly or seek to get out of them altogether. Whether a contract counterparty is excused from its contractual obligations or could seek to terminate a contract will depend on the terms of each contract and the relevant factual circumstances. You’ll need to consider both express contractual rights, such as force majeure and Material Adverse Change (MAC) clauses, as well as remedies in law such as excusable breach (niet-toerekenbare tekortkoming) or unforeseen circumstances (onvoorziene omstandigheden) – we discuss these below.
In contracts which are being drafted at the moment, you may wish to include additional commercial terms to try to protect yourself against the effects of the outbreak. For example, pricing adjustment clauses for contracts relying on tariffs or affected by exchange rate fluctuations, or step-in or buy-out rights to address performance concerns.
Can I or my counterparty terminate a Dutch law contract because of coronavirus?
This will depend on the drafting and the particular facts. Potential options open to a party include:
- Force majeure clauses: these relieve a party from the consequences of a failure to comply with an obligation where that failure is due to the occurrence of an event outside its control and may allow for modification or termination of the contract without liability. Under Dutch law, explicit force majeure clauses in the contract are not strictly necessary, since the statutory regimes of excusable breach and of unforeseen circumstances often lead to a similar result. However, if a contractual clause has been agreed, it will normally take precedence and may expand or limit parties’ options. The contractual clause should therefore be analysed to see whether the outbreak falls within its scope and the impact of the outbreak on the contract. Is there specific reference to an epidemic, pandemic or contagious disease? (The World Health Organisation’s declaration of the coronavirus outbreak as a ‘Public Health Emergency of International Concern’ may be relevant). For new contracts, parties may therefore want to expressly include (or exclude) coronavirus-related events.
- MAC clauses: these permit a party to terminate an agreement (or, in the context of a loan agreement, to call an event of default) where there has been a MAC (also called a ‘Material Adverse Effect’ (MAE)). They normally require a high threshold before they can be invoked (they may be specifically drafted this way or, for more general provisions, tend to be interpreted this way). A decision to call a MAC can be highly subjective and is usually a last resort. Generally, it is difficult to envisage circumstances where, in isolation, the coronavirus outbreak would trigger a business MAC on market standard terms in commercial contracts. Bespoke clauses might state otherwise. However, for some companies, economic repercussions of the outbreak in the medium term may give contract counterparties grounds to argue for a MAE on business, financial condition or prospects.
- Excusable breach/unforeseen circumstances: can be relied on if something occurs after contract formation, which is not due to either party’s fault, that makes it physically or commercially impossible to fulfil, or renders a party’s obligation radically different from that undertaken when the contract was entered into. A key question will be whether the risks that have materialized due to the outbreak (eg unavailability of supplies needed to fulfil a contractual obligation) should remain for the risk and account of the defaulting party. This could be the case either because the contract has (implicitly) allocated them to him or because general business standards imply that this risk should be borne by him, which in practice, will often be the case.
What other contractual points should I be aware of?
- Commercial terms: these may need to be renegotiated to reflect customs and excise procedures and tariffs, supply chain impacts or restrictions on movement of people. Consider whether the underlying economics of the contract may have changed as a result of the outbreak.
- Representations, warranties and undertakings: should these continue to be given? For example, representations that there is no default under a material contract, or no material contract which cannot be performed. For contracts being negotiated, consider carve-outs or qualifications, limitations on liability or disclosures. For existing contracts, waivers may be required.
- Invalid terms: this standard boilerplate clause could become critical if there is a change in law. What if new legislation is passed seeking to restrict the outbreak which results in provisions becoming illegal or unenforceable? Parties may need to amend clauses or sever them from the agreement. Aside from any express invalid terms/partial invalidity clause, there is also case law setting out when invalidity of one or more terms may invalidate the whole contract.
- Remedies: will damages will be an effective remedy? Would specific performance be more attractive or an obligation to negotiate in good faith or a variation procedure?
- Currency fluctuations: currency values may affect pricing so in new contracts consider how to allocate future risk such as through flexible pricing or hardship clauses.
Using Freshfields’ contract review Artificial Intelligence tools, we can assist clients by quickly identifying and extracting key contractual provisions, including force majeure, MAC, and change in law. By leveraging this technology, we can deliver substantial time savings when compared to manual review of contracts – regardless of volume. If you would like to discuss the contract review technology available, please speak to your usual Freshfields contact.
Obviously, a substantial portion of your commercial contracts, may be under English law (or any other law, including Chinese law or Italian law). The analysis under English law is marginally different, due to the concept of frustration rather than excusable breach.