How to deal with financial losses as a result of COVID-19? Practical 5 steps approach how to avoid or manage contractual claims

28 May, 2020

The COVID-19 outbreak is causing uncertainty around the world. Organizations are facing or have faced already significant challenges in their supply chain network. In the current world of global economy and international trade a delay or non-performance of one supplier may cause a chain reaction effect on the whole supply chain network, triggering a wave of claims, delay notices, Force Majeure notices, contract suspensions or even terminations.

"As companies navigate through the crisis it is important to consider mechanisms and processes to recover losses incurred and to protect themselves from potential claims."

Irina Novikova, Expert for Dispute Advisory und Damage Quantification

Quantify the losses sooner rather than later

Your Expert for questions

Irina Novikova

Irina Novikova
Expert for Dispute Advisory und Damage Quantification at PwC Germany
Tel: +49 69 9585-6070
Email

Organizations are currently suffering losses in connection with the COVID-19 pandemic. Losses could be pursued under various mechanisms including contractual claims, insurance claims, losses claimed from governments in response to decrees and/or other measures or under bilateral investment treaties.

"The exact mechanism to be used is something that needs to be assessed with legal advisers. Irrespective of the mechanism, the process to quantify the losses is similar – and this is something that should be done sooner than later," Irina says.

Force Majeure clauses

Many contracts contain specific clauses designed to protect the parties from the impacts of extraordinary events, which are beyond their control. In the international contractual law these clauses are called Force Majeure (FM). However, the topic of unforeseeable events may not be included in an explicit Force Majeure clause but may be addressed in the various clauses across the contract, such as Extraordinary Events, Acts of Government, Inability to Perform.

"The clauses are often designed to allow for a range of remedies from an extension of time to the relief from contractual performance, contract suspension or contract termination," Irina indicates. The analysis of Force Majeure or equivalent clauses needs to be performed on a contract level to understand its impact and potential enforcement.

Obligation to prove the losses incurred

Though regardless of the fact how the clauses are phrased in the contract and under which law they were signed, there is a general obligation of the injured party to prove the losses incurred. Specifically, this includes the occurrence and the amount of losses as well as the causal link between the loss and the loss event or the breach of contract (e.g. what losses were caused as a result of the government measures in the case of a claim against the government, or the direct connection to the COVID-19 pandemic, illustrating that the contractual nonperformance was due to the outbreak).

The injured party would also need to prove that it had taken reasonable steps to mitigate the losses incurred and disclose whether these losses have already been fully or partially compensated in other ways.

Act now and collect evidence

It is important to act now and start collecting evidence in relation to potential losses as later it may be difficult to go back and recreate and capture all the information retrospectively. In addition, later it is possible that important documents and information that may have supported the claim or its defense may be missed.

"In this regard it is worth considering organizing a central claims management team and a centralized process."

Irina Novikova, Expert for Dispute Advisory und Damage Quantification at PwC Deutschland

Best practice in 5 steps

Step 1: Perform contractual diagnostics

  • Review the specific contract terms that may give rise to a claim or potential issue (FM clause, Extraordinary events, etc.);
  • Review the contracts to identify potential problems. These can be for e.g. cross-border contracts, contracts under foreign law, contracts with Force Majeure clauses etc.;
  • Understand the requirements to make a potential claim or time limit when such claims or requests for compensation can be made;
  • Review procedural requirements for both parties to make a claim.

As pointed out above, the relevant clauses that cover extraordinary events may vary between individual contracts. In addition, there may be a vast number of contracts that need to be analyzed. Rather than performing a manual review, it is worth considering the use of forensic IT-Tools to support the contractual analysis. Such tools are based on artificial intelligence and efficiently support the process of identifying the relevant contract clauses and make them available for further legal assessment.

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Step 2: Record relevant cost

  • From the contractual diagnostics (mentioned earlier) identify the costs that you can potentially claim from your supplier, or that you can be confronted with by your customer.
  • These costs may include actual costs incurred, lost profit, obligation to reimburse a counterparty etc.

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Step 3: Document relation to COVID-19

  • Review the status of the contract before COVID-19 and assess the potential impact of the pandemic;
  • Verify if all the delays and disruptions or other negative impacts can be attributed to COVID-19 or if the contract was in delay (distress) before that;
  • Review causation requirements, if these are stated in the contract. Compile the evidence, that is required to support the connection to COVID-19.

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Step 4: Establish claim management process

  • Set up an internal process so that the information required to prove the loss is stored in one place and you do not have to search for it once needed. It is better to have more data and documents then less, but all of it should be relevant;
  • Develop and share approach, governance process and principle with the focus on ensuring a consistent approach with the same suppliers;
  • Issue an internal guidance how to process with the claim’s reviews. This can be a decision tree with Accept/Reject/Negotiate options.

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Step 5: Prepare/respond to claims

  • Make a request for compensation in a timely manner, within the time limit specified under the applicable contract, policy or regulation;
  • Identify the documents, required to justify the costs and causation;
  • Start collecting evidence.
  • Document appropriately steps taken to mitigate the effects of the potential crisis and their evolution as the crisis develops, such as: seeking to reduce wages and other fixed costs, finding alternative suppliers, negotiating deferrals, transfer of employees to another job etc.

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Contact us

Irina Novikova

Irina Novikova

Partner, PwC Germany

Tel: +49 69 9585-6070

Sally Trivino

Sally Trivino

Partner, PwC Germany

Tel: +49 211 981-7063

Dr. Michael Hammes

Dr. Michael Hammes

Director, PwC Germany

Tel: +49 69 9585-5942

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