COVID-19 and contract non-performance: wise companies are guided by business and human rights thinking

By GBI Chair Andrea Shemberg & GBI Researcher and Co-ordinator Benn Hogan*

Recent weeks have seen a flurry of legal advice on the question of contractual force majeure clauses, avenues to claim legal frustration or other ways to justify the non-performance of contracts, as companies scramble to mitigate losses arising from the COVID-19 pandemic. Company legal teams are no doubt spending many hours grappling with this question.
 

But legal approaches­ — and even typical commercial considerations — are not sufficient to guide good business decisions through the uncharted waters of this global pandemic. Such approaches will not help companies identify, avoid and mitigate the adverse impacts on people of either continuing or repudiating contract performance. Instead, companies would be wise to bring a business and human rights lens to such decisions, and those with a human rights team to lean on will be better equipped to do so.

Impacts on people of contract non-performance
 

With COVID-19 effectively pausing swathes of the global economy, it is unsurprising that companies are examining all possible avenues to minimise costs and eventual losses arising from quarantine restrictions, which have greatly impacted both production and trading capacity across the world.
 

Some companies have deferred contractual payments, refused to take delivery of already-produced goods, and cancelled large orders. These actions raise important questions about the impacts of their response. Risks abound: workers throughout supply chains consequently lose work and may be unable to weather the pandemic. In India, workers returned home from city jobs in their thousands, one estimate suggesting as many as one in three might be carrying COVID-19 along with them on their journey, spreading the contagion country-wide. Those who are staying put during India’s lockdown face cramped conditions in factory dormitories, which in this pandemic poses an imminent threat to their lives.
 

Conversely, where contract performance is being maintained, those who continue to work may do so at grave peril to their lives. Migrant workers may not have access to social security if they become sick, and travel restrictions mean they are unable to return home. Consider too the dangers of incentivising governments or suppliers to engage in forced labour, or labour in unsafe conditions.
 

The UN Guiding Principles on Business and Human Rights remind us that a business can become involved with adverse human rights impacts throughout its business relationships, which means contracts with suppliers and customers are well deserving of a business and human rights lens always - but especially now when the risk to human life is so high.
 

With this in mind, here are five tips for guiding good decisions on contract performance during the COVID-19 crisis:
 

1. Focus on limiting the company’s contribution to the health and economic crisis.  The decision on whether to continue contractual performance should be based on a priority concern - reducing as much as possible the company’s contribution to exacerbating the health and economic crisis. This will require tempering commercially-focused approaches that prioritise limiting losses or taking commercial advantage of the crisis. Some companies have for example, in deciding to continue performance, promised suppliers that they will not re-negotiate prices in an effort to take advantage of the crisis. Other companies have continued contract performance, paying early, or paying extra, even if legislation or ad hoc regulations would have allowed payment deferrals or other non-performance.
    
2. Engage with suppliers and customers to identify the potential impacts of continued performance or non-performance. Legal avenues to contractual non-performance should be considered in context, guided by an awareness of the impacts on people of non-performance. For example, cancelling orders already in production or completed and waiting to be shipped, without determining how this will impact suppliers and their workers should be avoided.  Engaging with suppliers and customers to understand the impacts of continued performance or non-performance is the first step to making better decisions.
    
3. Mitigate any impacts of continuing contractual performance. Where companies continue contract performance they can take concrete steps to identify and mitigate risks of that performance. For example, companies can support suppliers to ensure adequate protection for worker health and safety. Some ideas are a) lengthening delivery times so that fewer workers are on the job at the same time; b) providing personal protective equipment or training on COVID-19 safe working conditions to suppliers; c) stepping up efforts to ensure worker housing is appropriate for social distancing. 
    
4. Mitigate any impacts of contractual non-performance. Where a decision is taken to repudiate a contract, companies should consider what mitigating measures can be put in place to ensure supply chain workers livelihoods are insulated from the sudden loss of business. In this particular moment, the impacts of contractual non-performance should be considered in the context of cumulative and potentially devastating impacts on human lives. Mitigation efforts should match the human rights risks. Additionally, such mitigation efforts can help maintain business relationships, stabilize the supply chain and enable a smoother return to regular operations.
    
5. Work collaboratively, build and use leverage to mitigate impacts.  Companies would be wise to look to industry, sectoral, multi-stakeholder or other ad hoc collaborations to help to mitigate the cumulative impacts of either contractual performance or non-performance. Additionally, companies can reach out to governments and their suppliers to help ensure attention to urgent issues. Collaboration, as always in tackling human rights challenges, will help mobilise resources and energies. Perhaps never before has collaboration, empathy, mutual support and assisting suppliers – even those far down the supply chain – been more important to ensuring lives are saved.
    

The world is watching now to understand how much strife will come from the health and economic crisis that follows. The expectation on companies, when they consider non-performance of contracts, is that they will take actions that do not exacerbate, and also mitigate, potential impacts on people in the context of this crisis.