Business Contracts in a COVID World.
In the commercial world there is always change. However, following the COVID-19 pandemic, the rate of change has increased dramatically, and the changes are material to the way business is run.
Most business owners will be familiar with the issues. We are now in an inflationary environment, interest rates are increasing and there are serious supply chain issues. These issues need to be factored into commercial contracts.
A brief summary of some matters to consider are below.
Customer contracts and terms of trade
Mechanisms must be included to account for:
- Delays in sourcing materials.
- Delays due to staff illness.
- Ability to pass on costs for an increase in cost of materials.
- Quotes valid for shorter periods of time.
- The right to charge for storage. This is relevant for suppliers where delays in project mean that delivery isn’t required on the requested date and therefore finished product must be stored by the supplier pending delivery.
Businesses usually can’t rely on their old contracts to adequately deal with these issues. They need to be updated.
Inflation
Rising inflation needs to be factored into interest rates. Factors to consider include:
- Default interest rates in contracts may need to be higher than in recent times.
- To account for inflation, some contracts include a Consumer Price Index adjustment to pricing.
- Private lenders may want loans indexed to a bank floating rate rather than staying fixed for a long period of time.
Leasing
By now, most landlords and tenants are aware of the standard provisions in the Auckland District Law Society Deed of Lease relating to rent reduction in the circumstances where a tenant is unable to access its premises. Many new leases now include more detailed clauses specifying exactly how much a rent reduction will be and for how long in the event the premises can’t be accessed due to COVID-19 restrictions.
Material adverse change
When buying a business, or shares in a company, it is worth considering the inclusion of a material adverse change clause. This clause will give the purchaser the ability to terminate the deal before completion if the business changes for the worse. This can be useful with the current market uncertainties.
Employment
Employment agreements should be updated to include a business interruptions clause. Employers should also make decisions about how it approaches flexible working, and include the same in a policy. If employers put vaccination policies in place, then employers must review and consider whether those policies need to be changed. If they do then the employer must follow employment law processes to withdraw or vary those policies.
In summary, following the onset of the COVID-19 pandemic, many aspects of the way business is conducted have evolved. Businesses must adapt their operations and commercial contacts to keep up with these changes or risk being left with serious financial exposure.
If you feel you could use some specialist advice, don’t hesitate to contact the Commercial Team.
