This article is written by Meera Annie Koshy, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

A pandemic being an outbreak of a disease over a very wide area, crossing international boundaries and usually affecting a large number of people has an effect on the economy which will have an effect on the commercial contracts. COVID-19, the recent pandemic has caused worldwide unprecedented disruptions to business operations. The chaos continues. It has obstructed the ability of companies around the globe to maintain steady operations and perform their respective contractual obligations. There has been an adverse impact on the world economy. The immediate results were supply-chain disruptions, unintentional delay in performance and carrying out of the ‘contractual’ obligations. 

Companies are now paying more importance to integrating ongoing uncertainties and risks resulting from the COVID-19 pandemic into their standard business contracts. Some important clauses that need due consideration are discussed below. 

Force majeure

Companies, in order to mitigate the impact related to delayed operation and non-performance of the contracts, can take recourse to force majeure clauses contained in their contracts. A standard force majeure clause would require that the disruption in performance was due to an unpredictable event that was beyond the control of the parties. The word Force Majeure should be defined clearly so as to include all such unforeseeable events. The clause should be drafted in such a way as to include all the contingencies which would disrupt the performance of a contract. A vaguely drafted clause will not serve the purpose and cannot be used as a fallback provision in such emergencies.

Example: In the present COVID-19 case, if force majeure clause in the contract explicitly provides for events like epidemics, pandemics or government restriction the parties can take recourse to the provision in case of delay or nonperformance.  But if the force majeure clause is not clearly worded and simply uses the term “act of God” or “event beyond the reasonable control of parties” the situation will become complicated and the parties may have to take the matter to the court. 

Care should be taken to incorporate what would be the liability of parties in such cases where there are delay and cases of nonperformance and what is the remedy available to the other party. 

Payments based on commissions or profits

In some commercial contracts consideration may be partially or completely based on commission or profits.  Sales and marketing jobs in many industries, such as automobiles and real estate, generally offer commission-based compensation. It can be part of the salary of an employee or a separate form of income that is paid on a different schedule. It is calculated based on a percentage of total sales. Franchisee’s pay royalty calculated as a percentage of gross sales. 

Some types of commercial contracts like employment contracts, franchise agreements, book publishing agreements etc. have commission or profit based payment.  When parties are entering into commission or profit based contracts the process involved in calculating the amount should be laid down in the payment or consideration clause. There are several factors that affect the flow of income in such contracts. For example, there can be severe compensation and cash flow effects during a pandemic. Where payment is based on future profits, the effect of the risk in force majeure events may be allocated between the parties instead of only one party suffering. It would also be advisable to negotiate certain baseline or guaranteed payments, or at least payment advances, to account for future payment disruptions. 

Business interruption insurance

A business interruption clause or endorsement is designed to protect the insured for losses of business income it sustains as a result of direct physical loss, damage, or destruction to insured property by a covered peril. It may cover lost profits, fixed costs, the cost for temporary location in cases where business has to operate from a temporary location, training costs if there is a need to replace machinery and retrain personnel to operate the new machinery, government-mandated closure of business premises that directly cause financial loss, government-mandated closure of business premises that directly cause financial loss., employee wages, taxes, loan payments etc.  Business interruption policies are usually not sold as a separate policy but are either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider. 

After the outbreak of COVID-19, many businesses learned their business interruption policies did not cover the impacts of COVID-19. While entering into an insurance contract, businesses should ensure that their policies cover such situations. They can negotiate with their insurance companies to determine whether, and to what extent, they can purchase policies to protect themselves from situations that are similar to COVID-19. 

Effect of ‘shelter in place’ orders and workforce quarantines

The COVID-19 pandemic has caused many events around the world to be cancelled or postponed.  Contingency plans will minimize the business impact of cancelled or postponed events and enable organizations to overcome associated disruptions due to coronavirus, according to Gartner, Inc a leading research and advisory company. While entering into a contract parties could negotiate in advance for contingencies caused by sunk costs and lost profits. 

For workforce quarantines, employers may provide for work from home clauses in the employment contract that would oblige the employees to work from home in such situations.  A suitable work policy can be floated where the employee is required to procure the necessary equipment (computers, not connected with the required minimum speed etc.), at the cost of the company. 

For employments in which work from home is not possible the risk may be allocated between the parties and a clause may be provided for the same in the employment contract    

Supply chain challenges

Supply chain disruptions can be caused due to the ban on transportation, temporary lockdowns and extremely restricted human movement delaying supplies to companies and, in turn, performance of their delivery obligations. Affected companies may desire to be excused from their contractual obligations due to these events. If not provided for in a detailed force majeure clause, a supply chain challenge will not typically excuse one party from performance. Parties can anticipate the supply chain challenges that may impact performance in the contract and they can draft accommodations, discounts, and exemptions accordingly.

Notice provisions

Contract clause which provides for notice to parties usually provided for a standard method. This may not be appropriate in cases where there is a mass lockdown and for many businesses nearly all of the workforce continues to work from home, and the premises of the company will be practically deserted. On the flipside, notices that are only transmitted via email can be easily missed or end up in unchecked spam filters. Businesses should consider what type of notice is acceptable to them, both in terms of what is convenient to provide and what is reliable to receive, along with appropriate response periods. The contract may also provide for acknowledgement via e-mail or through any other means of communication that are acceptable for both. This provision may be included in the notice clause as an alternative in case of some situations which may be defined. 

Exclusivity

Contracts sometimes state that one party will be the exclusive provider of a product or service.  In situations like the present COVID-19 pandemic and related supply chain and labor force uncertainties, this may not work. The exclusivity clause can provide for exceptions in certain situations for example, if the supplier experiences delays the purchaser may want the ability to source its goods or services elsewhere. The exception clause must provide for all situations which are likely to happen and provide for a suitable remedy for each case. 

Training provisions

This clause may become significant in case of employee contracts where training is required for each new project. In such cases, an appropriate training policy may be drafted by the company which may include remote training and the infrastructure requirements for the same. Both parties could have access to the training platform and training can be done via the platform. Another case is where training is in connection with a service or product (particularly software), the parties should be clear about what will happen if there are travel restrictions in place that prevent in-person training from occurring. If video conferencing will be acceptable, parties concerned about security and quality may want to specify which conferencing platforms are permitted. Additionally, virtual training may justify a lower pricing model than in-person training.

Conclusion 

It should be noted that all the provisions discussed above unless it is specifically incorporated in the contract. In the present situation, all companies should revisit their standard templates and make sure they have imagined all the possible situations that would frustrate a contract and have made adequate remedies for the same. 

References 

• https://www.jdsupra.com/legalnews/drafting-commercial-contracts-eight-56773/
• https://www.mondaq.com/india/litigation-contracts-and-force-majeure/913944/covid-19-a-force-majeure-event-or-simply-a-pandemic 
• https://corporatefinanceinstitute.com/resources/careers/compensation/commission/#:~:text=Sales%20and%20marketing%20jobs%20in,a%20percentage%20of%20total%20sales
• https://www.investopedia.com/terms/b/business-interruption-insurance.asp 
• https://www.marsh.com/us/insights/research/business-insurance.html
• https://www.gartner.com/en/newsroom/press-releases/2020-04-07-gartner-says-contingency-plans-will-minimize-business-impacts-of-event-disruptions-due-to-coronavirus

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