Small companies will need an act of God to break contracts

Small companies will need an act of God to break contracts

At the start of this year it was a completely unknown virus.

But the sudden and unexpected emergence of Covid-19 and the ensuing pandemic have since come to dominate every feature of business and personal life. In a matter of weeks, this has created unprecedented public health and economic challenges right across the world.

In their response, a strategic battle is being fought by national governments and health authorities on every front to mitigate the risks and minimise its impact.

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Beyond the enormous loss of life, which rises inexorably each day, many countries are also having to endure an unprecedented level of disruption to working life and commercial activity in every area. 

At the same time, multiple borders have been closed and much of the world has been put in varying degrees of lockdown.

Key Points

  • Covid-19 has created public health and economic challenges
  • The loss will most likely fall on a supply chain’s weakest link
  • Many contracts contain force majeure clauses, which allow the parties to suspend performance

Even if governments eventually choose to bail out some sectors in their national strategic interest, a significant number of insolvencies, bankruptcies and redundancies are inevitable right across the spectrum.

Predicting where the axe will ultimately fall is invidious, but equally necessary for lenders and governments alike. 

Whatever strategies and contingency plans were already in place, they usually anticipated geographically specific events like a hurricane, potentially allowing companies to shift operations without much effort to offices in other locations.

But no business was fully prepared for the scope and scale of this eventuality.

The new normal, although the current situation is anything but normal, means that few businesses can function properly, and in some circumstances they cannot function at all.

As the current centre of the pandemic, Europe faces the additional problem of faltering global supply chains. Most likely, this will become protracted as the Covid-19 crisis only serves to highlight their pre-existing fragility: the severing of one link can cause extensive disruption throughout the rest of the chain.

Even in ordinary circumstances, supply chains and labour markets are complex and loosely structured. But these times are far from being ordinary.

The multiple effects of losses created by Covid-19 will be far reaching, enduring and on a scale never previously envisaged. Easily eclipsing the economic impact of the global financial crisis, you have to look back 90 years to the events of 1929-32 for a peacetime equivalent. 

The weakest link

The ideal supply chain should be configured with back-to-back contracts and pay-when-paid clauses. In the event of any significant problems arising, the consequential losses are then allocated proportionately and appropriately right across the supply chain, or to the parties who are insured.

But very few supply chains are ideal and such a configuration is the exception rather than the rule. In reality, the loss will most often fall on the chain’s weakest link. Often, that will be a small business that has been unable to negotiate let-outs with its customers or suppliers. You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.