The triggers to activate this termination right can be relatively wide ranging, covering both back-end events (such as petitions for the winding-up or liquidation of a company) and more front-end, early-stage events where there is a reasonable prospect of the business in question surviving (such as administration, schemes of arrangement or entering restructuring discussions with creditors).Ī party will need to consider carefully whether it wants to exercise such termination rights and particularly where short-term cash flow issues for a counter-party have triggered an early-stage insolvency related termination right because re-awarding contracts to suppliers who are on a substantially healthier financial footing may be challenging in the current climate. Most commercial contracts will have a termination right for (non-insolvent) parties if another party experiences one of a number of insolvency-related events. This problem will become more severe if “lockdown” restrictions remain in place during the coming months. The impact of COVID-19 has placed cash flow strains on many businesses, particularly those which are thinly capitalised. Any party seeking to terminate should also naturally be wary that it is in full performance of its own obligations to avoid a potential counter-claim for breach of contract. The termination provisions for prolonged force majeure may require substantially all of the performance of the contract to have been prevented, and not merely certain elements. However, parties should be wary of a “price majeure” moral hazard which may incentivise a party to exploit a force majeure event by using, or threatening to use, its termination right to bring a commercial contract to a premature end if it has become economically burdensome to perform due to the impact of COVID-19 or to drive better commercial terms if COVID-19 has resulted in a reduced number of competitors.Īny party seeking to terminate a commercial contract for prolonged force majeure should be certain that the requisite elements for force majeure (see our previous note: Commercial contracts, COVID-19 and Force Majeure) have been in place for either the appropriate continuous or aggregate period of time, and all relevant notice formalities have been complied with. The termination right varies between contracts with some being exercisable by either party, and others by only the unaffected party. Under commodities supply contracts (such as LNG SPAs) these periods tend to be longer.Īs the consequences of COVID-19 continue, it is not unreasonable to envisage that some commercial contracts will approach or meet these force majeure termination thresholds. As an example, under the FIDIC conditions of contract which are often used as the basis for procuring large industrial projects, these periods are 84 days and 140 days, respectively. While force majeure provisions frequently do not carry any entitlement to additional monetary compensation (even though the contract may subsequently become more expensive to perform), commercial contracts often include a termination right where a force majeure event has subsisted for a prolonged continuous period of time or a series of force majeure events have occurred for an aggregate period of time. Uncertainty Over Performance of Commercial Contracts Termination for Prolonged Force MajeureĪs has been widely discussed and analysed, COVID-19 (or events and circumstances flowing from COVID-19) may, depending on the circumstances and the specific wording, provide force majeure relief to a party prevented (or hindered, impaired or adversely affected) from performing its obligations under a commercial contract. COVID-19–IMPACT ON COMMERCIAL CONTRACTS IntroductionĬoronavirus (“COVID-19”), which was first reported in Wuhan, China at the end of 2019, and declared by the World Health Organization to be a pandemic on March 11, 2020, continues to have a severe impact on global business and trade, with most economies still to some extent in a government-ordered state of “lockdown.” Whilst the situation is fluid, and the long term impact of COVID-19 on economies and on businesses remains unclear, some shorter term issues in commercial contracts are coming to the fore as many countries approach their third month of “lockdown.” This memorandum seeks to examine some of those issues from an English law perspective.
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