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Contractual obligations under the coronavirus pandemic

As companies invoke force majeure clauses in their contracts to avoid specific performance, here is a more detailed checklist of other contracts that may need a comprehensive review as the COVID-19 lockdown continues

March 30, 2020 / 03:31 PM IST

PK Ghose

In recent times, non-economic shocks -- whether they are due to intensifying trade disputes like the US-China trade war, political upheavals like Brexit or high cost natural disasters like Hurricane IRMA in USA or the earthquake-cum-tsunami in Japan - have raised the questions on contract enforcement.

Now, the novel coronavirus, or COVID 19, pandemic has once again brought to focus on what corporates should do amidst this mayhem. While this is by no means an exhaustive list, it tries to put forth a few areas which corporates need to concentrate on.

General | A few items for consideration may include:
- The first thing to consider is whether COVID 19 constitutes a force majeure under existing contracts and to include a force majeure clause in those currently under negotiation
- Consider the consequences of declaring a force majeure event e.g. mitigation requirements and termination of exclusivity
- Examine the consequences of postponement of products from virus hit countries and the impact on health emergencies, pandemics and travel restrictions
- Assess whether COVID-19 will affect the company’s ability to meet its outstanding obligations – on account of a direct impact or outside supplier -- and draw contingency plans

Insurance: Analyse in totality all insurance policies to ensure the company is covered for damages resulting from the pandemic. Examine property & casualty (P&C), business interruption, business income, employees, general liability, director & officer (D&O) liability, cyber security and specific disease related policies.

COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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Mergers and acquisitionsBe realistic in your approach and timing when reviewing and closing potential transactions. Consider travel restrictions and quarantines. Consider the target entities’ ability to suspend or terminate agreements under force majeure and insurance policies related to pandemics.

Carefully review material adverse change clause to include COVID-19, adequacy of warranties and indemnities, standstill obligations and long stop date wherever applicable.

Supply chainReassess supply chain risks to make them more resilient to any kind of disruption - multi-sourcing strategies, supplier audits as a part of business practice. Companies should build inventory for critical components by increasing safety stocks.

Review commodity or index linked contracts

Financial systemExamine all financing documents to assess how COVID-19 will impact your ability to sustain your business currently and in future. Prepare for potential effects on interest rates, borrowing costs, property and asset values, contract modification for additional funding needs, amending terms of existing loan agreements or seeking waivers if unable to satisfy loan covenants. Proactively communicate with lenders and investors

Litigation: Proactively seek extension of deadlines

Employees: Place signages in all common areas to maintain hygiene - encourage stay and work from home - issue guidelines for employees returning from abroad. Above all, be lenient in paying salaries and emphasise prevention and control of spreading the virus

Cyber security: With employers and governments insisting on work from home it has become harder to:

- Maintain security and business continuity

- Maintaining confidentiality, integrity and availability of consumer facing networks as volumes spike. Information technology and legal will have to work together to safeguard their organisations

Future contracts: Recognising that there is only that much one can do in case of existing contracts except following a collaborative approach to renegotiate the clauses, it is necessary to review the following clauses in future contracts in the light of the pandemic: force majeure, client responsibility to secure their own travel insurance, inclement weather policies, cancellation and rescheduling, safe working environment, indemnification clause, limitation of liability, failure of company to perform services, etc

Onerous contracts: Recognise onerous contracts, lease agreements and ongoing and future revenue contracts.

PK Ghose is former Executive Director and CFO of Tata Chemicals and now a member of the CFO Board. The views expressed are personal

Moneycontrol Contributor
Moneycontrol Contributor
first published: Mar 30, 2020 03:31 pm