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COVID-19, contracts, and corporate social responsibility

Barbara Sotomayor, General counsel and chief legal officer, Habitat Inmobiliaria

As I write this piece, the recent Covid-19 developments in our country have forced private companies from all sectors to change the working practices in their corporate headquarters to working from home with immediate effect, to cope in real time with the evolving situation. These measures have been largely implemented with little warning and with a global- and country-wide effect, with the addition of uncertainty of the duration of these measures and their economic implications as the crisis develops.

In parallel, in-house legal departments are analysing and evaluating the effects of Covid-19 on contractual relationships of all sorts, as well as possible mitigating strategies that may need to be implemented. In particular, the performance of contracts that one can reasonably expect to be impacted by the spread of coronavirus (a large number of contracts of all types, indeed) will require deep analysis to confirm whether they include force majeure clauses that could potentially and ultimately excuse performance from any (or both) parties in the event an unforeseen scenario. These clauses are not always negotiated with the same intensity as pricing clauses, nor they are always drafted as carefully and, as such, their wording sometimes allows for different interpretations. The consequences arising from such a force majeure event will largely depend on what is provided in each particular contract. These clauses will sometimes include the right, under very exceptional and unforeseen circumstances, to suspend contractual obligations, to extend contractual milestones, or even to terminate the contract by either party depending on its intensity and duration. In other contracts, the affected party may be obliged to continue and adopt, where possible, remediation measures such as seeking alternative suppliers to meet its contractual obligations.

“In the long term this crisis will likely change the way we face risks generally. It will affect the way we work and interact in a professional environment.”

Important attention should also be placed on possible compensation from costs arising from any losses due to a force majeure event. In any case, it is crucial to bear in mind that determining whether the coronavirus qualifies as a force majeure event, as well as the enforcement of the relevant contractual consequences, will rely on the courts’ interpretation of the evidence provided by the parties and the legal merits of each given case.  This will require an individualised analysis of the particularities of the agreements concerned, and an assessment of the available evidence in order to give proper advice on the potential consequences of their force majeure clauses. These clauses will now have the opportunity to be tested in the scenario of a pandemic crisis. In-house legal departments will play a leading role in this issue, as it will be crucial for any contracts that play a strategic role for the company and/or affect the continuity of other activities.

On a different note, in the long term this crisis will likely change the way we face risks generally, and the approach corporations of all sizes and sectors take in respect to the possibility of unpredictable crises and assessing their impact. It will affect the way we work and interact in a professional environment.  Risk control departments, as well as legal risk assessments from in-house departments, will rise in importance internally, with potential scenarios being updated periodically and previously unconsidered risk categories being added to companies’ risk matrixes.

It will also likely give a different meaning to corporate social responsibility, putting it at the forefront of all boards and giving visibility to companies with strong leadership on this front who show a real, strong commitment towards it. We are now seeing great examples of true leadership that goes beyond direct responsibilities within companies to a much larger scale: Leading initiatives that, thanks to the huge power of globalisation and the scale of social and professional networks, have a very powerful reach. Let’s hope that we all, individually and general counsels in particular, succeed in giving this our best, always thinking in the long-term.