Briefing

24 March 2020

Coronavirus: implications for Belgian law contracts

The impact of the novel coronavirus (COVID-19) outbreak has been widespread with implications for multiple sectors of the global economy. We identify below some implications of the outbreak for Belgian law contracts.

What practical steps can I take now?

Some practical steps that may be taken considering the coronavirus outbreak include the following:

• assess if your (or your counterparty’s) performance of contractual obligations may be affected and take reasonable steps to work around the identified risks or discuss them with your counterparty. Where you can perform some but not all of your contracts, think carefully about which contracts you prioritise, bearing in mind applicable laws and relevant contractual provisions;
   
• in a supply chain context, identify whether you are dealing with different laws applying to different points of the chain and what that means in relation to the overall performance of the contract. If your supply chain is exposed to the effects of the outbreak, line up fall-back options;
  
  
• consider whether your insurance policies cover the outbreak or its knock-on effects;
  
  
• assess what rights you have and what you need to do to protect or enforce them. For example, be aware of notice requirements which are preconditions to exercising a force majeure clause or invoking insurance protection;
  
  
• keep a detailed record of how the coronavirus outbreak and its consequences are impacting your performance – this may be useful in later disputes. Consider carefully the text of any communication or record that is created working on the basis that what you write may be later scrutinised by the other party’s lawyers and by a court. Check that effective dispute resolution provisions are in place;
  
  
• consider the longer-term relationship with your counterparties, and whether force majeure or the other principles discussed below might be used as leverage to negotiate a sensible commercial solution to current issues;
  
  
• consider other commercial and reputational risks that may arise from the outbreak, including HR/employment issues and the risk of counterparties becoming insolvent; and
  
  
• assess whether and how to communicate with counterparties pre-emptively to seek solutions to the issues raised.
  
  

How might the coronavirus outbreak affect my contract?

Contracts may be affected by the legal and economic consequences of the outbreak, amid supply chain disruption, travel restrictions and turmoil across different markets. The first step is to review existing contracts and those being negotiated (including standard terms of business).

In existing contracts, parties may struggle to perform them properly or seek to get out of them altogether. Whether a contract counterparty is excused from its contractual obligations or could seek to terminate a contract will depend on the terms of each contract, the governing law and the relevant factual circumstances. You will need to consider both express contractual rights, such as force majeure and Material Adverse Change (MAC) clauses, as well as remedies in law such as force majeure or abuse of rights – we discuss these below.

In contracts which are being drafted at the moment, you may wish to include additional commercial terms to try to protect yourself against the effects of the outbreak. For example, (i) pricing adjustment clauses for contracts relying on tariffs or affected by exchange rate fluctuations or where the value of a business to be acquired depends on its operations and revenues post-acquisition, (ii) step-in or buy-out rights to address performance concerns, (iii) explicit references to the outbreak in contractual force majeure or MAC clauses or (iv) additional conditions precedent linked to the impact of the outbreak on your or your counterparty’s business operations or on the timing and process for obtaining any regulatory approvals.

Can I or my counterparty terminate a Belgian law contract because of the coronavirus outbreak?

This will depend on the drafting of the contractual provisions of your contract and on the factual circumstances (case-by-case analysis). Potential options open to a party include:

• Contractual provisions
  
  Force majeure clauses: these relieve a party from the consequences of a failure to comply with an obligation where that failure is due to the occurrence of an event outside that party’s control. Force majeure may allow for modification or termination of the contract without liability.
  
  Under Belgian law, explicit force majeure clauses in a contract are not strictly necessary, since the statutory regime of force majeure often leads to a similar result (see below for further details on the statutory regime). However, if a contractual force majeure clause has been agreed, it will normally take precedence and may – depending on the drafting – expand or limit the parties’ options upon occurrence of a force majeure event. The contractual clause should therefore be analysed to determine whether the outbreak falls within its scope, what needs to be done to enforce it and what the impact of the outbreak will be on the contract. Is there for example a specific reference to an epidemic, pandemic or contagious disease? (The World Health Organisation’s declaration of the coronavirus outbreak as a ‘Public Health Emergency of International Concern’ may be relevant). For new contracts, parties may want to expressly include (or exclude) coronavirus-related events from the definition of force majeure.
  
  MAC clauses: these permit a party to terminate an agreement (or, in the context of a loan agreement, to invoke an event of default) where there has been a material adverse change or ‘MAC’ (also called a ‘Material Adverse Effect’ or MAE). Two separate MAC clauses exist: business MAC clauses (changes affecting the company/target and/or its group) and market MAC clauses (for systemic-inherent market risks). In M&A agreements, when MAC clauses have been negotiated, they will most likely be included in the contract either as a condition precedent to closing or as a termination right. MAC clauses normally require a high threshold before they can be invoked (they may be specifically drafted this way or, in case they are more general, tend to be interpreted this way). A decision to invoke a MAC can be highly subjective and is usually a last resort. Generally, it is difficult to envisage circumstances where, in isolation, the coronavirus outbreak would trigger a business MAC on market standard terms in commercial contracts. Bespoke clauses might state otherwise. However, for some companies, economic repercussions of the outbreak in the medium term may give contract counterparties grounds to argue for a MAC on business, financial conditions or prospects. Unlike for force majeure, there is no statutory MAC rule under Belgian law and it therefore needs to be specified in the contract.
  
  
  
• Remedies in law
  
  Belgian law does not include a doctrine of hardship, and frustration of purpose will generally not be available either as an option to avoid enforcement. However, a party to a contract can consider the statutory regime on force majeure and the abuse of rights doctrine as potential defences to enforcement.
  
  The statutory regime on force majeure
  
  Irrespective of any contractual force majeure provision, a party to a Belgian law governed contract can also attempt to invoke the general statutory rules on force majeure (included in the Belgian Civil Code) to seek to be released from its contractual obligations and liability.
  
  These rules apply by default as part of general contract law but are not mandatory. This means that parties may contractually exclude or otherwise alter these rules (e.g. by specifying the qualifying events and consequences, hence enlarging or narrowing the scope of force majeure). The statutory rules should therefore always be considered in light of any alterations or exclusions that would have been contractually agreed between the parties.
  
  The statutory concept of force majeure is generally understood to be an event occurring after the conclusion of the contract and having the effect of rendering impossible the performance of a contractual obligation. The mere fact that the performance of an obligation has become more complicated or burdensome is not sufficient to meet the threshold. For example, the performance of an obligation to make a payment (e.g. the payment of a purchase price) will in principle not be considered impossible as a result of changed economic circumstances. The “impossibility to perform” threshold will be assessed considering the factual circumstances at hand. Relevant considerations in assessing this threshold include the following:
  
  
  • Certain case law has shifted away from an absolute stance towards what constitutes impossibility to perform and favoured a more reasonable or practical approach.
    
    
  • For a debtor to successfully invoke force majeure, the impossibility must not be due to any fault on his/her part in the occurrence and consequences of the event. The event must have been unforeseeable and inevitable. Similarly, for force majeure to apply, the debtor must not have been put on notice of his/her default yet.
    
    
  • When faced with force majeure, a debtor of a contractual obligation is required to take all reasonable steps to limit the damage for his/her contractual partner. This also calls for swift communication to the contractual partner of any impossibility to perform.
    
    

If an event of force majeure occurs rending performance impossible, the impact on the contract will depend on the nature of the event. A temporary obstacle will allow suspension of performance, while a permanent obstacle will entail the permanent release of contractual obligations and liability without payment of damages. In case of reciprocal contracts, the suspension or extinction by force majeure of the obligations of one party will lead to the suspension or extinction of the correlative obligations of the other party. This may ultimately result in the dissolution of the entire contract going forward.

The coronavirus outbreak may constitute an event of statutory force majeure entailing release of contractual obligations if the following cumulative conditions are met:

(i) performance of the relevant obligation is rendered impossible by the pandemic or its consequences (e.g. government measures adopted in the context of the outbreak)

(ii) the contract had been entered into before the outbreak of the pandemic and the debtor had not yet been put on notice of default at the time of the outbreak, and

(iii) the debtor has taken all reasonable steps to ensure performance of his/her obligations after the outbreak of the pandemic.

The abuse of rights doctrine

Should the hurdle of force majeure be too high, the abuse of rights doctrine may under certain circumstances also provide certain leeway for debtors facing difficulties complying with their contractual obligations. Under the abuse of rights doctrine, a debtor could argue that by reason of the coronavirus outbreak and its widespread consequences it would be unreasonable for the creditor of contractual obligations to insist on performance. Courts may then mitigate performance to what is considered reasonable in light of the current economic disruption.

What other contractual points should I be aware of?

• Commercial terms: these may need to be renegotiated to reflect customs and excise procedures and tariffs, supply chain impacts or restrictions on movement of people. Consider whether the underlying economics of the contract may have changed as a result of the outbreak.
  
  
• Representations, warranties and undertakings: should these continue to be given? For example, representations that there is no default under a material contract, or no material contract which cannot be performed. For contracts being negotiated, consider carve-outs or qualifications, limitations on liability or disclosures. For existing contracts, waivers may be required.
  
  
• Invalid terms: this standard boilerplate clause could become critical if there is a change in law. What if new legislation is passed seeking to restrict the consequences of the outbreak which results in provisions becoming illegal or unenforceable? Parties may need to amend clauses or sever them from the agreement. Aside from any express invalid terms/partial invalidity clause, there is also case law setting out when invalidity of one or more terms may invalidate the whole contract.
  
  
• Remedies: will damages be an effective remedy? Would specific performance be more attractive or an obligation to negotiate in good faith or a variation procedure?
  
  
• Currency fluctuations: currency values may affect pricing so in new contracts consider how to allocate future risk such as through flexible pricing or hardship clauses.

Using Freshfields’ contract review Artificial Intelligence tools, we can assist clients by quickly identifying and extracting key contractual provisions, including force majeure, MAC, and change in law. By leveraging this technology, we can deliver substantial time savings when compared to manual review of contracts – regardless of volume. If you would like to discuss the contract review technology available, please speak to your usual Freshfields contact.

Obviously, a substantial portion of your commercial contracts may be governed by laws other than Belgian law. If you have any specific questions on contracts governed by laws other than Belgian law, please let us know, or contact your usual Freshfields contact.