Performance and potential default under contractual obligations in times of COVID-19

Performance and potential default under contractual obligations in times of COVID-19

Following the COVID-19 outbreak, many states have taken extensive measures to limit further spreading of the virus. The pandemic will have various implications, such as disruption of supply chains, interruption of production, temporary reduction of supply and decreased demand for products and services. Consumer behavior will alter, people are traveling less and events such as concerts, lectures and conferences have been cancelled.

Boards of Directors within each company, are responsible for protecting the interests of their companies against counterparties, i.e. claimants, employees and other contracted parties, as well as the company’s shareholders. The situation may test obligations as provided for by law. It is therefore important to take appropriate steps towards limiting any damage that COVID-19 may cause, directly or indirectly.

The importance of a risk assessment

It is necessary for companies to carry out an operational risk assessment, focusing on the analysis of both the contractual and legal obligations of the company. Additionally, it is important that companies are well informed of the legislative remedies that are envisaged because of the pandemic, and then, where appropriate, how companies can avail state aid. Companies should seek ways to re-negotiate deadlines, apply for refinancing and work towards restructuring. Companies may, or foreseeably will, default on contractual obligations, which calls for a review of any valid trade agreement with regards to possible fulfillment of obligations under the contract considering altered premises and clauses possibly granting freedom from liability.

Any current contract will thus need to be assessed with respect to force majeure clauses (i.e. with regards to unforeseeable circumstances caused by external events), and where there are none, whether the scope of legislative provisions granting freedom from liability due to unforeseeable external events are valid. As an example, the Sale of Goods Act stipulates as a general principle that the buyer has a right to performance in accordance with the obligations under the contract (performance in natura). This principle does however not apply in case of a hindrance of performance, outside of the seller’s control. The Act further stipulates that the buyer is not entitled to indemnification for damages caused by arrears of the seller, if the seller can prove that the arrears are caused by an external hindrance, outside of the seller’s control, which he could not reasonably have been expected to predict, avoid or overcome upon signing of the contract. 

Upon such review and execution of a risk assessment, thought must be given to formal requirements of non-performance clauses or general principles, i.e. whether the contracted parties are obliged to notify the other party of their intent to claim freedom from liability due to unforeseeable external events or altered premises, without undue delay. In that sense, with respect to the above-given example, the seller is expected to react expeditiously. It is important that the buyer is notified as soon as the seller is made aware, or could be made aware, of the hindrance in question in order to ensure their legal rights.

It is important that companies realize what steps must be taken in order to limit the economic impact of the virus while the pandemic passes by.

Experts at LOGOS assist with analyses and risk assessments

At LOGOS, we have experts with extensive experience and knowledge of company restructuring and refinancing, as well as analysis of contractual obligations and remedies for potential non-performance.

Should you require assistance or further information with regards to the above, please contact Helga Melkorka Ottarsdottir or Einar Baldvin Axelsson, partners at LOGOS.

Helga Melkorka Óttarsdóttir

Helga Melkorka Óttarsdóttir

Einar Baldvin Axelsson

Einar Baldvin Axelsson