doing business ARTICLES

Points To Consider When Entering Into Commercial Contracts During The Covid-19 Pandemic

Points To Consider When Entering Into Commercial Contracts During The Covid-19 Pandemic

“The covid-19 pandemic has greatly affected the business activities of enterprises, especially activities related to commercial transactions. Negotiation on specific provisions in the contracts to eliminate risks during this difficult period is absolutely necessary. This requires enterprises to determine the impact of the socio-economic situation on the terms of the contracts and the implementation plan of the enterprises. For contracts which are going to be signed during this time, enterprises should pay attention to the subject of the contracts, the implementation duration, the acceptance, disclaimer, and force majeure events because these are considered terms that could be potentially affected by the pandemic. These issues shall be analyzed by PLF in this article.”

Subject of the contracts:

Usually, a commercial contract is concluded with the goods or services specifically described in the terms of the contract. The terms of the subject of the contract usually refer to the details of the goods such as quantity, technical characteristics, packaging specifications, or detailed description of the service. However, due to the complications caused by the pandemic, it can lead to supply chain fractures in the market. In some cases, the enterprises might have to find alternatives such as sourcing similar goods but different from the original description in the contract. Therefore, in order to calculate these risks, besides the terms which the parties agreed upon in the contract(s), the parties should further agree on new terms and conditions accepting alternative goods or services with similar description. The parties can consider signing other terms as well to solve the problem. Doing this limits the risk of any of the parties not being able to fulfill the obligations of the contract due to complications caused by the pandemic. Suppliers’ notices may also be used as supporting documents to prove the failure of delivery of the correct type of goods agreed in the contracts.

Delivery time or implementation schedule:

The parties need to pre-forecast factors that may affect the time or progress of the contracts. Accordingly, the sellers or service providers may consider reserving additional period of time over the time taken under normal conditions to serve as the basis of the agreement with the other parties. The addition of such provision for extension of time for delivery, or extension of schedule, taking into account the effect of the pandemic, should be considered by enterprises.

Acceptance:

In order to avoid delay in the progress of contracts which may lead to violations of the acceptance, the parties in the contracts should consider the option of partial acceptance. Contracting parties may divide the contract into several stages for acceptance instead of acceptance of the whole contract at once, except for cases where it cannot be broken down into stages. At the same time, the sellers or service providers should not agree on fines for violations caused by delay or failure of acceptance in this clause in the contract(s).

Regulations on notices and exchanges between the parties:

Usually, notices and exchanges between the parties in the contracts are made in writing. However, remote working due to the pandemic caused some limitations to travel, signing ect. This may affect the enforcement of these terms. Therefore, enterprises need to agree that exchange should be done not only in writing but also by email. The contacts of the parties should be clearly specified in the contracts or the attached appendix.

The disclaimer clause:

Currently, both the ‘Commercial Law’ and the current ‘Civil Code’ stipulate that the parties will be exempt from liability. Specifically, the Civil Code allows obliged parties not to perform their obligations in the event of force majeure. In such an event, they shall not be liable for civil liability, unless otherwise agreed or otherwise provided for by law. The ‘Commercial Law’ also stipulates that parties are exempt from liability when force majeure events occur. Therefore, when negotiating a contract, the parties should consider including the disclaimer clause in the terms of the contract when a force majeure event occurs. When non-force majeure events take place, the parties may handle problems that arise if the contract is violated or not performed, based on the terms of the contract

Force majeure events leading to disclaimers:

The parties should clearly identify cases considered force majeure events and specify the same in the contract to ensure the possibility of applying this clause during the performance of its contract. Currently, in accordance with the law, “force majeure event is an event that occurs objectively, which cannot be foreseen and cannot be remedied, despite taking all necessary and permissible measures.”

Thus, the enterprises should note that there are three conditions for an event to be considered a force majeure event. They include: (i) objective, (ii) unpredictable and (iii) cannot be remedied, despite taking all necessary and permissible measures.

In particular, events that take place objectively can be understood as events occurring due to natural or human causes that the affected party cannot know such as tsunamis, earthquakes, natural disasters, epidemics etc. Further, this event must be beyond the control of people, especially the enterprises have made efforts to solve the problem but still cannot be solved.

However, in the current context, Covid-19 is considered an  epidemic under the government’s directives. If the enterprises have signed contracts before the Covid-19 epidemic, the enterprises may be considered as having unforeseen the effects of this epidemic.

In addition, the enterprises can also pay attention to contract performance when circumstances change fundamentally in accordance with Article 420 of the Civil Code 2015. Normally, in contracts, the parties do not agree on this issue but when a change of circumstances affects the performance of the contract, the parties in the contract usually apply it in accordance with the provisions of law. However, as analyzed above, if the contracts concluded at the time of the Covid-19 epidemic are complicated and the parties are aware of this situation, it is difficult for enterprises to apply this regulation to reduce damage in the event of violation or inability to perform the contractual obligation(s).

Enterprises need to run business activities for survival, especially obtaining revenue and profits through commercial contracts. Signing commercial contracts help enterprises survive. However, enterprises also need to carefully consider and negotiate the terms and conditions in the contract, and must ensure that the contracts can be implemented. Measures should be taken to avoid risks arising from the impact of the Covid-19 epidemic. In particular, the enterprises should pay attention to the terms of the contractual stipulations pertaining to duration of implementation, acceptance, disclaimer, force majeure events and methods of notification, and exchange of information between the parties during the performance of the contracts. Careful preparation makes it possible for the enterprises to anticipate and be aware of the risks that lead to inability to perform contractual obligations or breach of contracts.

Writing time at 17:30 on 22/06/2021.

The article is based on applicable law at the time noted above and may no longer be relevant at the time the reader approaches this article due to the change in applicable law and the specific case in which the reader wishes to apply. Therefore, the article has only reference values.

Share on facebook
Share on twitter
Share on linkedin
We'd love to meet you and let you the perfect solution