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Editor's Note: A number of contract issues may have special impact in the course of a pandemic. Whether reviewing a standard commercial agreement or a more specific agreement, such as a merger or acquisition contract, the following checklist will assist in identifying key provisions that may require additional analysis or negotiation.
⃞ Whether the new coronavirus outbreak is in fact a force majeure event under a particular contract depends on the contract's language and the individual facts and circumstances at issue. In other words, a party's ability to exercise its rights under a force majeure clause is determined on a case-by-case basis.
⃞ In most circumstances, for a party to obtain force majeure relief because of the coronavirus, the party will at least need to prove the coronavirus outbreak falls within the contract's definition of “force majeure,” and comply with any preconditions or notice requirements specified in the contract's force majeure clause.
⃞ Certain events that have already occurred globally make it more likely (though not certain) that the coronavirus will be considered a force majeure event, regardless of a contract's specific definition of “force majeure.” For example, the World Health Organization (“WHO”) declared on January 30, 2020, that the coronavirus outbreak constituted a Public Health Emergency of International Concern (or “PHEIC”) and, on March 11, 2020, a pandemic.
⃞ The coronavirus outbreak is also more likely to be a force majeure event if the contract explicitly lists “diseases,” “epidemics,” “pandemics,” “quarantines,” or “acts of government” as examples of events falling within the definition of “force majeure.” If, on the other hand, the contract does not explicitly list examples of qualifying force majeure events but instead defines “force majeure” generally as an event beyond the parties’ control, there is more room to argue the coronavirus outbreak is not a force majeure event. This sort of broad, catch-all language could be interpreted differently depending on the applicable law.
A number of representations and warranties should be reviewed more closely. These may include:
⃞ No Undisclosed Liabilities: Consider representations that would capture undisclosed liabilities relating to the Covid-19 outbreak.
⃞ Financial Statements: Consider financial statement representations, particularly as to the adequacy of reserves.
⃞ Adequacy of Internal Controls: Representations regarding the adequacy of internal controls should focus on the ability to uncover potential Covid-19 related losses.
⃞ No Material Adverse Effect: The MAE (or material adverse change, MAC) definition should be negotiated to allocate risk between buyer and seller for Covid-19 related effects.
⃞ Accounts Receivable and Accounts Payable: Consider representations as to collectability of A/R and ability to pay A/P as the result of the Covid-19 outbreak.
⃞ Material Contracts (including Customers and Suppliers): These representations should cover the status of certain material or key contracts, including as to the counterparty's failure to perform under the contract and any termination rights.
⃞ Inventory: Consider representations regarding adequacy and viability of inventory and supply chain (including availability of alternative suppliers), geographic scope of operations (including any dependencies on impacted areas), and ability to maintain sufficient inventory reserves (including shortfall, if any).
⃞ Non-Reliance: Note that sellers are likely to consider strengthening non-reliance provisions in the purchase agreement to further limit buyer's reliance on projections and forecasts.
⃞ Additionally: Consider adding representations and warranties that may not typically be included in a purchase agreement relating to the target company's emergency and risk management protocols, contingency planning, privacy and business continuity processes.
⃞ Insurance Coverage: whether losses or disruptions due to the coronavirus will be covered will likely depend on the coverage of the applicable insurance policy, additional diligence may be required to discover what, if any, limits are present in a policy and what notice requirements are needed to use the policy. Review whether a counterparty or target has business interruption, supply chain disruption, or other specific policies.
⃞ Impact of Coronavirus on Financials: review how the disruptions as a result of coronavirus has required extended periods of production delays or shut-downs, employee furloughs, and similar issues.
⃞ Ability to Honor Agreements: investigate whether counterparties will have the ability to honor contracts in the short to medium-term (including whether they have sufficient cash flow to meet obligations).
⃞ Supply Chain Disruptions: identify the company's affected suppliers, parts or materials, and transportation providers. Determine whether a company is especially at-risk from supply chain disruption based on the geographic location of suppliers.
⃞ Additional caps and baskets may be necessary or appropriate to allocate risk proportionally in indemnification provisions.
⃞ Review termination for cause and termination for convenience provisions, including what constitutes a material breach or financial covenant breaches (e.g. insolvency guarantees).
⃞ Sellers can reduce risk by shortening the amount of time between the delivery of goods and services and payment (especially when buyers may have cash flow problems).
⃞ Advance payments or quicker turn around periods for payment may make manufacturers and producers more comfortable with distressed companies.
⃞ Material adverse change or event clauses are common on agreements but rarely invoked. Negotiate the scope, foreseeability, probability, and subjectivity of MAC/MAE clauses to more closely fit the clause to the facts and circumstances of the relationship of the parties.