The Path Forward

Does Your Company Need To Change Its Contractual Process In Light of COVID-19?

By Barbara F. Dunn & Cristina Alma McNeiley

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It has been one year since the COVID-19 pandemic began to ravage through the United States and around the globe. During this time, many businesses and organizations have struggled to make tough decisions and look to what lies ahead. As a new year begins, it’s important for businesses and organizations to look back and reflect on what was learned in 2020. In light of the ongoing efforts to combat this pandemic, now is a good time to consider making any necessary changes to your contracts. Here are a few key issues to spot and analyze when reviewing your contracts during these unprecedented times. 

FORCE MAJEURE CLAUSES

Force Majeure Events
Typically, most contracts contain what’s known as a force majeure or “Act of God” clause. These clauses tend to allow one or both of the parties to be excused from the performance of the contract and liability if certain unforeseen and natural events occur. While some force majeure clauses may contain a pandemic or epidemic provision, others generally do not. Organizations should review their contracts to look at the specific language of their force majeure clauses. Consider implementing pandemic and/or epidemic language. Amid current nationwide conditions, including such language will ensure safeguard non-liability. 

Frustration of Purpose Provisions
Normally within the force majeure clause lies a frustration of purpose provision. Under this provision, performance of a contract made be discharged where, after a contract is made, a party’s principal purpose for entering into the contract has been materially frustrated by the occurrence of a force majeure event. The force majeure was one that neither party assumed would occur at the time the contract was signed, although it is important for contracts signed now and in the near future to note that the pandemic could still be considered a force majeure event. Frustration of purpose can be caused by business closures, travel advisories, unanticipated cancellations, and more. Look to see if your contracts include this type of provision as they may be beneficial during very uncertain times. 

CANCELLATION/TERMINATION CLAUSES

If your force majeure provision does not include pandemics, next would be to look at your cancellation/termination clauses. Normally included in the cancellation clause is the right to terminate the contract due to a material breach. Typically, these clauses require giving written notice of a breach to the other party and, in some cases, the right to cure (fix) the breach before the contract is terminated. Check your clauses to identify how termination can occur and review the notice requirements associated with this clause. 

RISK MANAGEMENT CONSIDERATIONS – INSURANCE CLAUSES 

There are two types of insurance that many businesses have in place. The first is a general liability insurance, which typically covers claims made against the business for personal injury, property damage, or death. The second is business interruption insurance, which typically covers a business’s losses if it cannot conduct its business due to a circumstance beyond its control. During these unique times, organizations should review their existing insurance policies to see if they could apply to COVID-19. This is crucial as, in more recent years, many insurers have taken steps to exclude pandemics from their coverage policies. Take the time to review your contracts in order to stay protected.

SAFETY OF EMPLOYEES

As an employer, organizations always should consider and make the health and safety of its employees a top priority. Make sure your organization is staying abreast of local state and county regulations regarding an employee’s ability to work during a pandemic. If you have employees working from home, consider including a work-at-home policy in your employee handbook. Have internal conversations about work-at-home requirements and what your expectations are from each of your employees. These conversations can encompass how employees still should be maintaining normal business hours and also ensuring that your employees have the materials needed to allow them to work from home. 

PAYMENT OF DEPOSIT CLAUSES

Many contracts include payment of deposit clauses. In these clauses, if the organization fails to pay any amount due under the contract by a specified due date for payment, the other party may, by notice in writing, require the organization to pay an additional fee or security deposit. You may want to review these policies to ensure that if any unforeseeable event was to happen, you will not lose out on money already paid. Consider changing payment terms so that they are more favorable if an unanticipated event occurs. Moreover, make sure that your organization is not overextending work if you are not getting compensated. 

Many organizations and businesses continue to navigate their contractual processes during these extraordinary times, and now is the time to be sure you are doing the same. It is important to have an attorney evaluate your specific contracts to determine whether you are protected from every angle. Be sure to reach out to your legal counsel if you have any additional questions on how to update your contracts so that your organization can make the best decisions for your employees, customers, partners, and yourselves. 

Barbara F. Dunn is a Partner with the Associations and Foundations Practice Group at Barnes & Thornburg, where she concentrates her practice in association law and meetings, travel, and hospitality law. She can be reached at 312.214.4837 or barbara.dunn@btlaw.com. Cristina Alma McNeiley is an Associate with Barnes & Thornburg and can be reached at 312.214.2104 or at cristina.mcneiley@btlaw.com.

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