As the fallout from the COVID-19 global outbreak will seemingly play out over the near term, contractual counterparties should first seek practical, commercial solutions where COVID-19 related performance issues arise.

In most cases, the practical solution will rule the day. However, the market turbulence and inability to predict when and how the impact of the coronavirus will abate necessitates understanding the rights and obligations under a company’s most material commercial contracts.

Below are a few easy questions a company can ask to evaluate its rights and obligations, as well as its counterparty’s rights and obligations, under key contracts. 

See here our note outlining in more detail some of these issues as well as potential defenses to performance caused by unforeseen circumstances.

First, identify the most material contracts to your business: 

  • What are the key contracts from which your business earns significant revenue? 
  • What are the business critical supply and service contracts on which you rely on third parties to perform? 
  • Is your – or your counterparty’s – performance impeded, or likely to be impeded, by the COVID-19 outbreak?

For commercial contracts:

  • Have you contacted your counterparty to discuss potential fallback options?
  • Are you required to provide notice under the contract if performance will be delayed or impeded for any reason, including delay for force majeure?
  • Is the counterparty solvent, and if not, do you have a fallback in case the counterparty files for bankruptcy?
  • Do you have business interruption or other insurance that may cover failures to perform caused by the COVID-19 outbreak? What notice of claim is required under the policy?

For M&A agreements:

  • Does the “material adverse effect” (MAE) clause address pandemics? In US M&A transactions, the risk of pandemics (like COVID-19) will almost always be shifted to the buyer, meaning that COVID-19-related impacts on the target business will not permit the buyer to walk away from the transaction.
  • Carefully consider whether each of the business reps and warranties (e.g., material contracts, operation in the ordinary course of business, etc.) can be given without any additional disclosure or qualification. Also, for buyers, note that rep and warranty insurers have started to exclude certain COVID-19-related losses for coverage under rep and warranty insurance policies, so the policy must be read carefully.
  • Review timelines to make antitrust and other governmental filings regulators, to pay the purchase price and to respond to regulatory inquiries. You may need to account for delays. 

For debt documents:

  • What are the financial covenants that need to be met and when do they need to be certified?
  • Are you at risk of any ratings downgrade, and if so, what are the implications?

Understanding what your contracts say – and your, and your counterparties’, rights and obligations thereunder – is the first step to any resolution of any performance issues caused by COVID-19.

For a company’s most material contracts (which are often negotiated with the assistance of outside counsel), it is wise to seek advice from counsel prior to engaging in any discussion regarding performance delays or failure.