COVID-19 – Outsourcing customers are facing hard choices but can leverage robust contract protections

COVID-19 has now spread to almost all of the world and WHO has declared it a pandemic. More countries including Denmark are taking severer measures in use to avoid or slow down the virus spreading. The public sector in Denmark is closed except from the most important functions and the private sectors are asking their employees to work from home or are taking other measures to mitigate the risks both in respect of employees’ health and the companies’ financial situation. This newsletter addresses some of the questions the customer should consider in outsourcing and it-contract in the event the supplier is not performing or the customer anticipates poor performance in the near future, if the supplier claims force majeure or if the customer cannot receive the supplier’s deliveries due to the current COVID-19 situation.

The supplier is not performing or the customer anticipates non-performance will occur in the near future

The supplier must notify the customer of the force majeure situation, the supplier cannot just stop the services. As long as such a force majeure notice has not been received in accordance with the notice procedure in the contract, the customer should expect delivery as agreed.

In the event the supplier is not performing in accordance with the contract and has not claimed force majeure, the customer’s first reaction should be to write the supplier and claim breach of contract specifying which deliveries or services have not been provided, reserve all the customers rights according to the contract and finally ask for a remediation plan and information to understand the issues.

The customer has by this letter ensured the customer’s position under the contract for a period of time and will hopefully have caught the supplier’s attention. This may lead to the supplier’s prioritising solving the delivery problems. If not, the customer should investigate other options under the contract; please see bullet points below on “other remedies”. If the supplier’s reaction to the breach letter is to claim force majeure please see next section on “force majeure”.

In the event the customer are expecting important deliveries within a short period of time or the company is moving into a phase where the supplier’s performance of services under the contract are of great importance to the customer’s business, and the customer anticipates that the supplier will not be able to perform then the customer should act proactively. The proactive measures should be both in respect of the day-to-day corporation and dialogue with the supplier but also by investigating the options under the contract:

• Is there a force majeure clause in the contract the supplier may claim is in effect;
• Is there a legal doctrine on force majeure or similar in the jurisdiction under which the contract is regulated that could come into effect;
• Is there other clauses the supplier may rely on in this situation e.g. hard ship clauses or other specific relief event clauses;

Furthermore, some contract have other remedies that may be possible to enforce as long as force majeure is not established:

• Is there a step in right and would it be possible for the customer to enforce this effectively;
• Is there proactive risk management or proactive remedies agreed that may be used to mitigate or limit the risks if activated;
• Are there other rights and remedies that could mitigate the risks and/or ensure the customer’s rights under the contract;

The supplier claims force majeure

The Danish Sale of Goods Act § 24 is not directly applicable for services or software deliverables and it can be discussed if the general principles deriving from this paragraph can be claimed if the contract is silent on force majeure in respect of services. In the following we assume that most it- and outsourcing contracts have a force majeure clause which is worded in line with the general principle of force majeure for goods.

In the event a force majeure situation is deemed to exist the supplier will be relieved from his obligations to deliver under the contract for the time period the force majeure situations exits, but as stated above the supplier must notify the customer of the situation.

Furthermore, in the event the supplier claims force majeure under the contract referring to an agreed force majeure clause, it will always be based on a specific interpretation of the situation and the wording of the clause whether force majeure can be claimed or not. It is generally important to note, however, that it is the supplier who must demonstrate that the COVID-19 situation is a force majeure event under the contract. Even if the clause specifically refers to epidemics or governmental regulations this will not in itself be enough to constitute force majeure under a usual force majeure clause.

The supplier must specifically demonstrate that the situation was unforeseen, when the contract was signed and that it is impossible to perform or deliver under the contract. For all contracts signed in 2019 and before the situation will most likely be regarded as “unforeseen”, however, for new contracts signed in 2020 this may be argued dependent on when the contract was signed in relation to the expansion of the COVID-19 outbreak.

In respect of demonstrating that delivery is “impossible” it is not sufficient that the fulfilment becomes more expensive or will become unprofitable to the supplier. Further, the customer should be aware of the following situations:

• If a sub-supplier is not delivering to the supplier and claims force majeure towards the supplier this is not sufficient prove of force majeure towards the customer, the supplier is still obligated to try and find another sub-supplier or the supplier should take over the sub-suppliers delivery;
• Meetings can be held and information be exchanged by using telecommunication both internally and with the customer;
• In the event key resources are ill the supplier will have to investigate if other resource can replace these key resources or if work can be restructured until the key resource is well again;
• In complex contracts with multiple services and deliveries and where the supplier are present in and delivers to multiple jurisdictions, the supplier must investigate the delivery situation for each element of the services, since some service elements may be possible to deliver, e.g.:
  • Some service elements may be provided by the supplier’s staff working from home with remote access to it-systems etc., but in this case the security requirements of the contract should still be fulfilled;
  • In the event some employees need to be at the supplier’s workplaces to perform their work, this can be handled by imposing restrictions at the workplace. Have employees work with a “safety distance”, ensure masks and disinfectant are available and if needed and legal screen the employees for fever when they come to work;
  • The services may be provided from different countries with different restrictions enabling the supplier to continue some services as usual or with less restrictions in certain countries;
  • In the above situation the supplier should also investigate if the services can be reallocated to other jurisdictions with less restrictions or jurisdictions where the supplier have better facilities to enable delivery, however, this will still require the GDPR requirements are fulfilled;
  • The above also applies to deliveries from different locations within the same country, i.e. the supplier may have a location where employees can work in single offices and not share toilets etc. if they have to work from the suppliers offices to deliver the services;
• The fact that it is not possible to receive a visa for a short work stay in Denmark is not in itself a force majeure situation. The supplier needs to investigate if he can allocate Danish resources e.g. from his own organisation or hire a Danish located subcontractor, or provide the services remotely;
• In the event a governmental regulation requires a full lock down, i.e. it is not allowed to be outside or go to workplaces, some parts of the services may be impossible to deliver, if it is not possible to provide the required services by having the employees working from home; However, will not be for all services, since it will most likely always be allowed to go to e.g. a datacentre to replace a physical server or a power supply.

Based on the above Gorrissen Federspiel’s current advice if a customer receives a claim for force majeure from a supplier is that the customer should (i) challenge if the deliver is actually “impossible” and (ii) ask for specific evidence for each service element reminding the supplier that it is not sufficient to fulfil the requirement of “impossible to deliver” that the fulfilment becomes more expensive or will become unprofitable to the supplier. Furthermore, the customer should (iii) claim breach and reserve its rights under the contract, and we recommend this even though the customer are working closely with the supplier to solve the delivery problems.

In the event the supplier accepts that force majeure is not in effect and provides the customer with alternative solutions to solve the delivery issues, e.g. by moving service delivery to other locations/countries or having the employee’s work from home. These alternatives should be documented as temporary changes to the contract. Further, the customer should discuss and agree in writing with the supplier to which extent , if any, the customer can accept some delays in deliveries, deviations or suspensions of fulfilment of some or all service levels for a temporary period of time to provide the supplier with some latitude in the effort to ensure the service delivery.

Can the customer claim force majeure?

All the criteria set out above in respect of the supplier claiming force majeure applies to the customer as well. If the parties have contractual force majeure clause and it refers to epidemics or governmental regulations, this will not in itself be enough to constitute force majeure under a usual force majeure clause. The customer must specifically demonstrate that the situation was unforeseen, when the contract was signed and that it is impossible to perform or deliver under the contract. If this can be demonstrated the customer will be relieved of its delivery obligations for the time period the situations exits.

The most usual “delivery” from the customer to the supplier under a contract is payment for the services. The fact that the COVID-19 situation provides challenges for the customer’s cash position will not be considered a force majeure situation under Danish law which have a strict responsibility for making payments.

However, in complex it-contracts and outsourcing contracts the customer will most likely also have other obligation under the contract than payment. These obligations could be, e.g.:

• Testing and approval of deliveries;
• Participation in meeting to plan, provide information or make decisions necessary for the supplier to continue working;
• Provide the supplier with access to it-systems;
• Buy new hardware and install this to enable the supplier to deliver software;
• Update operations software in existing infrastructure to enable the supplier to deliver software;
• Have other suppliers’ of the customer provide information to the supplier or corporate with the supplier to enable the supplier to deliver;
• Allow the supplier physical access to customer’s locations in order for the supplier to deliver.

In respect of the above examples the customer must demonstrate that it is impossible to fulfil, and as for the supplier it is not sufficient that it will become more expensive for the customer to fulfil than expected. Prior to informing the supplier of force majeure the customer should investigate in which ways the customer’s obligations under the contract can otherwise be fulfilled regardless of the COVID-19 situation:

• Meetings can be held and information be exchanged by using telecommunication both internally and with the supplier;
• To the extent the customer’s employees can work from home with remote access to it-systems this should be arranged;
• In the event some employees need to be at the customer’s workplaces to perform their work, this can be handled by imposing restrictions at the workplace. Have employees work with a “safety distance”, ensure masks and disinfectant are available and if needed and legal screen the employees for fever when they come to work (please see: https://gorrissenfederspiel.com/coronavirus-og-overvejelser-vedroerende-medarbejderne/ (danish only));
• In the event key resources are ill the customer will have to investigate if other resource can replace these key resources or if work can be restructured until the key resource is well again;
• Ensure tight coordinating with customer’s other suppliers where their assistance is needed or deliveries are expected to enable the supplier to deliver, since they will also be affected by the situation;

Generally the customer should coordinate closely with the supplier to enable the delivery of services and to ensure that the customer can fulfil its obligations under the contract. In the event the contract have clauses that allow the customer to postpone deliveries or have other clauses that can provide the customer with latitude these should of course be considered. Such clauses often have a time limit or can only be used once or twice under the contract or provides the supplier with similar rights, so the timing of such initiation is important to consider.