Contracting through uncertainty

With New Zealand set to come out of level 4 lockdown next week, many businesses will be starting to re-open and increasing their level of operations.  While this may not yet be “business as usual”, there will be business to be done, which means entering into contracts with suppliers, customers, service providers and other parties.  This may particularly be the case if you are adapting your business model to enable non-contact operations (such as delivery services) during alert level 3.  Given the current COVID-19 crisis, there are a number of factors to consider as part of your commercial contracting going forward.

Force majeure

The ability to suspend your obligations (or excuse liability) where you are unable to perform a contract due to reasons beyond your control is an important contractual right in our current environment.  Your ability to do so will be a matter of the particular wording in your contract.

It is therefore important to contractually define what will constitute a force majeure and what the impact of such an occurrence will have.  It will no longer be enough to refer to matters that are “unforeseen” and “outside of your control”, as it may be “foreseeable” that level 4 lockdown conditions return and/or you may wish for the clause to be enlivened when you follow Government best practice with a force lesser than law.

We recommend that, at a minimum, contracts entered into at this time expressly deal with epidemics and the impact of Government enforced shut downs or restrictions.  You should carefully consider the wording of your clause drawing on the real life experience of the impact the alert level 4 restrictions had (and level 3 may continue to have) on your business, as well as the impact of closed borders and quarantine/isolation requirements (which may manifest in employee absences).  This should ensure you have an appropriate contractual pathway to avoid additional liability arising.

Supply chain

Even if you are in a situation where you are comfortable that your business will be able to operate or have appropriate contractual recourse, what will happen if a third party upon which you rely is unable to perform?  It may be that your logistics provider cannot move the goods, or your supplier cannot get materials to you.  In drafting your contractual provisions, consider all aspects of your supply chain and when your obligations may need to be put on hold to one party due to the inability of another person to perform.

MAC clauses

If you are looking to enter an acquisition agreement with a settlement date in the future (such as to purchase a business or property), some buyers may be able to negotiate a “material adverse change” condition. This means that if a sufficiently adverse change or event occurs, the buyer can cancel the agreement and walk away.  Again, these clauses are a matter of contract, and must be carefully drafted to ensure they respond appropriately.  In considering the operation of the clause, it is important to remember that COVID-19 is an existing issue, so it may be difficult to establish that alone constitutes a “change” if the agreement is signed at this time.

These are buyer favourable clauses, and will not be accepted by sellers in many negotiations, but if you do have this negotiating power, then consider carefully what type and scale of “change” would cause you to want to have the right to cancel the deal and ensure it is properly reflected in the document.

Uncertainty

There is a possibility that New Zealand may move in and out of lockdown conditions over the near future.  Although many contracts allow force majeure events to be called and lifted, and then called again, there are often termination rights if they are prolonged (either consecutively or in aggregate).  It is also likely we will see some company insolvencies and you should consider the impact upon your contractual obligations should another party not pay you as anticipated.

Whilst you cannot contract for every scenario, we recommend you ensure that any new contractual arrangements are stress tested against a series of reasonably anticipated scenarios to ensure it is sufficiently robust and you are protected.

Solvency and director duties

As you may be aware, new safe harbours are to be introduced regarding director duties in connection with insolvent trading (read more here), however this does not give directors carte blanche to act without careful consideration.  Directors must continue to act with reasonable care, skill and diligence, in good faith and in the best interests of the company.  It is also important to note that the safe harbours will only be available if certain conditions are met (such as being solvent on 31 December 2019 and a reasonable basis for considering it more likely than not the company will be able to pay its debts within 18 months).

It is therefore important in authorising the execution of a new contract, that directors have carefully considered their duties, and if they are relying on the safe harbours, that the basis for them considering that they meet the criteria is properly documented.

Recommendations

Given the uncertainty in the current climate, we recommend that parties carefully consider the potential impact of COVID-19 upon contractual terms and the party’s obligations. For all material contracts, we recommend you seek legal advice and exercise an extra degree of caution before signing.

If you would like any assistance with this process, then please do not hesitate to get in touch.