As one can imagine, a major issue that has dominated most discussions since the outbreak of the COVID-19 pandemic is the impact of COVID-19 on contractual performance and relationships. The potential impacts of COVID-19 on contracts have been discussed and debated by professionals from articles to webinars. No doubt, this is also an issue that boards of companies have spent hours discussing and analyzing. This is hardly surprising given the important role contracts play in solidifying business relations.
Most webinars and articles have concentrated on the impact of COVID-19 on the formal aspects of contractual relationships. Recommendations that have been suggested and argued for mitigating the disruptions caused by COVID-19 include force majeure declaration, invoking material adverse effect/material adverse change clauses, triggering price adjustments or outrightly declaring the contract as having been frustrated. The above recommendations are not out of place, they are indeed fundamental principles that businesses should be closely considering backed by relevant professional advice and guidance.
It may however be wise for companies to also consider the ‘long game’ and not be overwhelmed by the short-term challenges posed by COVID-19 into making contractual decisions that may permanently close an income stream for the business and destroy valuable relationships. Given the expected post-COVID-19 business retention and business expansion race, companies must be thoughtful when exercising their contractual rights.
Rather than strictly enforce a contractual right (e.g. declaring/rejecting a force majeure or resisting a renegotiation request) in line with the legal principle that parties are bound by their contractual terms, companies may explore a ‘gentleman’s approach’ with their counterparties in resolving business difficulties and disruptions caused by the COVID-19 pandemic.
The underpinning of the ‘gentleman’s approach’ is the fundamental understanding that we have all been impacted by the COVID-19 pandemic and therefore, we should choose to face and find solutions to business challenges and disruptions in a collaborative manner. Simply put, businesses should consider adhering to the biblical proposition of being our ‘brother’s keeper’ in these uncertain and challenging times. This approach will foster cooperation, understanding and ultimately preserve the contractual relationship beyond COVID-19.
While a dogmatic approach to contractual relations may secure an immediate win, major losses arising from breakdown in relationships may occur in the not too distant future. As such, contractual parties should brainstorm to explore ways to carry each other’s burdens during this COVID-19 period.
Where a contractual party inevitably has to invoke/reject a force majeure claim, resist a renegotiation request or strictly enforce the parties’ contractual bargain, it may be worthwhile for decision makers to informally contact their counterparties to discuss their position and why their decision is unavoidable in the COVID-19 business environment. This is because when the current battle with COVID-19 is finally won and we are all confronted with the new reality, decision makers in organizations will certainly ask themselves and their business counterparts fundamental questions – one of which is, what/how did organization X contribute to our COVID-19 war efforts?
Therefore, prior to taking a decision to invoke a force majeure on a contractual relationship, resist a renegotiation request or on any other contractual matter, decision makers must ask themselves: how can I collaborate with organization X to ensure that we jointly withstand the adverse impact of the COVID-19 pandemic and find solutions to our current challenges?
Going forward, organizations may, where relevant, explore a formal relational contract relationship, particularly for long-term contracts. This approach to contracting, hinged on open, effective and frequent communication, mutual trust and cooperation between contracting parties, sets out mutual goals and creates governance structures to ensure that the expectations and interest of the contracting parties are aligned throughout the contractual relationship.
The benefit of the formal relational contract approach is that it stimulates mutual contractual satisfaction, which preserves long-term relationships. As noted by B.C. Forbes, “the bargain that yields mutual satisfaction is the only one that is apt to be repeated”.
 David Frydlinger, Oliver Hart and Kate Vitasek, ‘A New Approach to Contracts’ Havard Business Review < https://hbr.org/2019/09/a-new-approach-to-contracts> accessed 26 April 2020.
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