Have You Thought About ... Contractual Provisions Impacted by COVID-19?

Have You Thought About ... Contractual Provisions Impacted by COVID-19?

Jul 15, 2020

Client Alert

Brownstein Client Alert, July 15, 2020

The following is a sampling of contractual provisions impacted by the outbreak, continuation, and possible resurgence of COVID-19 (or other, future health emergencies). It is not intended to be exhaustive, but illustrates the type of provisions that may be impacted. The first group of provisions is present in most contracts. The other groups of provisions are organized by type of agreement. The comments in the tables below are written from the perspective of negotiating new documents (or amending existing documents) as opposed to analyzing existing agreements for breach or satisfaction of closing conditions, etc. In drafting, it is important to consider the interplay among provisions. For example, parties may be less concerned with revising covenants if the force majeure provision is generous and excuses performance as a result of a pandemic. It becomes important to carefully assess even the so-called “boilerplate” provisions, which are often tucked in at the end of an agreement under the heading, “Miscellaneous.”

Keep in mind that concepts presented in one table might be applicable to situations in other tables. We elected not to repeat issues throughout.

Generally Applicable Issues



1. Deadlines and Agreement Term

Reconsider timelines and ensure that the agreement term, and performance timelines are long enough to allow for reduced hours, unexpected closures, failures of performance or delays by third-parties/service providers, and/or allow for tolling of deadlines based on well-crafted triggers (such as a resurgence, for example).

2. Definition of “Business Day”

Assess the definition of “business day” to ensure it is flexible enough. For example, is it a business day if essential businesses are open, but all others are under a stay at home or safer at home order; or if a business may legally be open, but elects to close? The definition is often tied to days when banks are open. What if some bank branches are open, but many are not?

3. Indemnification

Analyze the indemnity structure to determine if revisions are necessary to carve out breaches resulting from COVID-19. This may be quite difficult to negotiate into a contract (counterparty resistance); however, consider that, at a minimum, deadlines/procedures may need to be altered.

4. Permits, Licenses and Approvals

Consider the impact of COVID-19 on the ability to obtain and maintain permits, licenses and other necessary approvals. Address the potential that approvals from governmental agencies and third parties might not be possible from time to time due to closures, furloughs, etc.

5. Notice

Will anybody be present to receive and process/forward notices to the proper person? Allow email notice and revise notice provisions (often viewed as “boilerplate”) so that physical delivery to an office is not the only means to provide notice. Note that jurisdictions are continually updating their stay at home rules, etc. If you opt for email notice, consider using multiple recipients for each party, using a new/general legal notice email address (e.g., legalnotice@company.com), requiring a subject line (e.g., “LEGAL NOTICE” in all caps) for notice to be deemed proper, requiring notice parties to add the email address of all counter notice parties to their “safe senders list” (to avoid emails going to spam), etc.

6. Signatures

Allow electronic signatures/Docusign, etc.

7. Dispute Resolution

If you/your client is averse to alternative dispute resolution (arbitration, mediation, etc.), then reconsider your position in light of government shutdowns, restricted building access, and the reality that mediation and arbitration administrators were quick to adopt virtual meeting technology.

8. Audit, Inspection and Facility Access Rights

If a client cannot audit, inspect or access books/records or goods or facilities of another party in person (due to stay-at-home rules, or if the target has elected to not have an open office or facility), then these provisions are rendered meaningless. Consider language requiring the target to make books/records available electronically and, if practicable and meaningful, providing for virtual inspection or access. Consider language requiring the target to make books/records available electronically and, if practicable and meaningful, providing for virtual inspection or access. In addition, consider whether to allow the target of the audit/inspection/access to restrict onsite access to its facilities if it is required to do so pursuant to any applicable laws, regulations, orders or declarations related to COVID-19 (or other health emergency), and/or allowing the target to require appropriate wellness certifications and/or checks.

9. Key Persons

If your agreement names specific individuals as the key decision maker or service provider, consider whether there is a backup or team in place if needed.

10. Deemed Approvals

Consider the impact of “silence-means-approval” concepts.

11. Consent

Consider COVID-19-related difficulties obtaining stockholder and board consent.  Evaluate whether it is possible/desirable to obtain consent vote by written consent or a virtual meeting.

12. Termination

Consider the potential impact on ability to terminate (e.g., the right to terminate upon a trigger related to COVID-19).

13. Financial and Performance Metrics

Consider whether changes are necessary to financial and performance metrics tied to a fixed time period, e.g. working capital, earn-outs, requirement/supply arrangements, etc., to account for business changes as a result of a pandemic and whether to provide for alternative metrics, resets or other consequences in response to a pandemic.

14. Force Majeure

Consider who should bear the risk of a pandemic, and note that the term of the force majeure provision will impact other provisions. For example, if the force majeure provision excuses performance in the event of a pandemic, then it may be less important to address that risk in other provisions (e.g., deadlines). Consider whether the concern is the inability to perform at all (prohibition), or whether the concern is a diminished ability to perform (reduced capacity, for example, making operations less profitable or unprofitable).


Limited Liability Company Agreement/Joint Venture Provisions



1. Definitions of “Available Cash”/“Distributable Cash”

This usually has a carve out for “Reserves” which allows holding back cash in excess of what might be “customary and in the ordinary course.” This could be expanded to allow management to build a defensive war chest for a pandemic-related or other hardship.

2. Agreed Value and Fair Market Value

The value of a business or asset is often assessed for buy-sell purposes, and in connection with capital contributions and capital raising activity. Consider whether valuation process/procedure accounts for existing or reasonably expected impacts of the pandemic. For example, perhaps the business cannot be open due to health orders, or elects not to be open because it would be inefficient to open in a limited capacity. Items such as anticipated supply chain disruptions, trade sanctions and retaliation, and other temporary matters might need to be accounted for in valuation provisions.

3. Approved Budgets

Members in a limited liability company often formulate a mutually agreed upon “approved budget” to guide operations and establish when calls for additional capital contributions may be made. Furthermore, failure to agree on an approved budget could be the subject of a buy-sell. Parties might not agree on how those issues are impacted by COVID-19, and how that impacts strategic and operational plans and budgets, and the definitions of Available Cash/Distributable Cash.

4. Profits Interests/Vesting of Equity Generally

Consider giving management the discretion to extend vesting periods and conditions due to pandemic related situations that might close offices or otherwise limit the amount and/or type of work that can be done. In addition, note that vesting is often tied to continued employment, so it is worth considering whether you want to take into account pandemic-related furloughs or layoffs when calculating vesting, forfeiture, etc.

5. Investment/Commitment Periods

Consider giving management the discretion to extend these from time to time if deemed fair to investors in light of future conditions arising from the pandemic.

6. Management/Managers

Consider alternatives to address potential incapacity, illness etc. This is not necessarily a COVID-19 issue, but the present conditions make this perhaps a more visible concern.

7. Indemnification

Consider whether a limited liability company manager could be “grossly negligent” for not following every pandemic-related best practice, and therefore be ineligible for indemnification that is provided for in the governing agreements or statute. If the business fails, consider whether a manager could be liable for failing to apply for government assistance programs such as the Paycheck Protection Program, Emergency Injury Disaster Loans and other programs similar to those made available during the COVID-19 pandemic, or would that be protected by the business judgment rule?

8. Major Decisions

Decisions regarding when to close an office, when to reopen an office, and/or what procedures will be put in place when opening, closing, and reopening, could be added to the list of “Major Decisions.”

9. Meetings

Ensure that the governing documents permit virtual meetings, and that the company has the right to hold meetings that are only available virtually.


Securities Purchase Agreement for Offerings



1. Definition “Material Adverse Effect”

If representing the seller, consider excluding pandemics from the definition of “material adverse effect.”

2. Representations and Warranties

Examine whether any changes are necessary or new representations/warranties are warranted, such as those regarding undisclosed liabilities/changes to financial statements, conduct of business in the ordinary course, timely governmental filings such as with the Securities and Exchange Commission or the Internal Revenue Service (both of which have granted filing extensions in response to COVID-19), etc.

3. Closing; Closing Conditions

Make sure virtual closing is allowed. Consider potential barriers to or the impact on closing as a result of COVID-19, such as delays in obtaining consents and approvals from governmental agencies and third parties, and assembling closing deliverables due to furloughs or lack of in-office personnel, office closures, etc.

4. Covenants

Examine whether any changes or new covenants are necessary, such as those regarding maintaining existence, making filings with governmental entities, complying with law, performing contractual obligations in the ordinary course, operating in the ordinary course, and meeting financial covenants.


Asset Purchase Agreement; Merger Agreement



1. Purchased Assets/Excluded Assets and Assumed Liabilities/Excluded Liabilities

Consider whether it is necessary to distinguish among assets (and associated liabilities) as included/excluded depending on whether the values and/or liabilities may fluctuate as a result of COVID-19.

2. Purchase Price Adjustment

Consider whether to regulate loss of value from COVID-19.


Commercial Agreements



1. Marketing Obligation

Consider the COVID-19 impact.

2. Price and Payment Terms

Consider whether to regulate changes in demand or value resulting from COVID-19 and late payments.


Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.

This document is intended to provide you with general information regarding updates related to coronavirus. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. 

The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and articles are not automatically updated, continued accuracy cannot be guaranteed.

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