For businesses without force majeure clauses in their contracts to modify costs when events like the COVID outbreak arise, there is still a possible - and lesser-known - way to get out of contractual obligations.
That’s because many contracts, especially those written in the entertainment and travel industries, often carry a “termination for convenience” provision that allows for one party to back out without incurring penalties - even when no reason for the termination is given.
Given many B.C. businesses have clients involved in the travel and entertainment sectors, it may thus be prudent for owners to review their contracts as soon as possible for the risk of key counterparties pulling out of contracts without cause, one analyst said.
“I think the key message is the need for companies and businesses to review their key contracts so they can get a real understanding of their risk exposure during this pandemic,” said Jennifer Tsai, legal content producer for Toronto-based Kira Systems, which uses software to identify certain clauses in contracts. “Are they party to contracts that - because of the situation right now - may no longer be advantageous to their survival?”
According to a report compiled by Tsai, while only 46% of the 132 contracts reviewed by the analyst using Kira methods found “termination for convenience” provisions that could be used in the current situation, that percentage jumps to 73% for companies in the amusement/recreation services industry.
Another sector with a high impact on B.C. - cruise lines - also saw 73% of its contracts containing a similar cause, which may mean a significant number of local businesses in these industries are exposed to the risk of clients pulling out of contracts suddenly and without cause.
Tsai added that the companies reviewing their own contracts can also take this opportunity to not only identify the risk of losing business contracts, but also identity possible cost-saving areas (by finding contracts they can rid themselves of) in order to stay afloat as a last resort.
“A lot of businesses are being put in tough situations right now, so while terminating the contract might not be the first choice or an ideal solution, with all the challenges you see in the travel and entertainment industry, it is one viable option if force majeure isn’t available,” she said.
The exposure to such contracts isn’t as high in other travel and hospitality subsections, however. Airlines and transportation services only saw 45% and 44% of their respective contracts containing “termination for convenience” provisions. That number is even lower for car rentals (20%) and restaurants (20%).
Tsai added that, while many companies may have been overwhelmed with the number of contracts they sign in the past - thus allowing things like “termination for convenience” to slip through the cracks in contracts without fully understanding its effects - she expects Canadian companies to be much more careful when it comes to future contracts and their ability to be flexible in cases like a COVID outbreak.
“Volume-wise, even though companies will still be dealing with so many contracts after this, it’s a changed world. There will be a new normal, and people will start paying more attention to boiler-plate language like never before.”