These "new normal" times during COVID-19 have presented emerging growth companies and small businesses with the opportunity to harness their strengths of creativity, scrappiness, and high-risk appetites to help stabilize and continue growing their businesses.
In some cases, businesses have pivoted to help serve ancillary markets that have experienced increased demand during COVID-19 (e.g. education, emergency and healthcare supplies, and grocery). At the same time, the challenges facing emerging growth companies and small businesses cannot be ignored, including a sense of uncertainty around business contracts with service providers and customers. This outlines a few general trends that service providers and customers have taken to help combat some of the uncertainty during these times.
- Force Majeure. “Force majeure” (aka the Acts of God) clauses have made the legal news headlines throughout COVID-19. This clause aims to exclude party liability for breach of contract where the delay or failure to perform is due to an external event that is outside of the reasonable control of the party who would otherwise be in violation of the agreement. This provision may specifically call out pandemics or include language likely encompassing a pandemic (e.g. public health crisis). Service providers or customers who have found it impossible or impractical to perform under a services agreements due to COVID-19 may consider trying to exercise their rights under a force majeure provision to terminate or suspend a service agreement without being in default.
- Time Extensions. If the services aren’t impossible or extremely difficult to perform but will take additional time to complete, the service provider and customer can discuss whether a time extension is appropriate. For example, if the original term of the agreement was 12 months, and due to the pandemic 18 months is a more reasonable timeline for completion, the parties could amend the MSA to reflect an adjusted term. In some cases, a time extension will be favorable for both the service provider and customer because the service provider will have more time to perform its obligations and the customer will have additional time to pay the associated fees.
- Fees. As mentioned above, some customers may appreciate additional time to pay the service fees, however, this is not generally the most favorable outcome for the service providers. Due to the ever-evolving times and uncertainty around fee collections, service providers could give their customers both extensions on payments and incentive to pay early or on time. For example, some service providers may consider a 5-10% discount or credit for customers who pay on time or early.
- Covenant Waivers. Most master service agreements include restrictive covenants, such as non-competition, non-solicitation, and insurance requirements that may have become additionally burdensome on either party due to COVID-19. For example, the insurance premiums may have increased for some highly affected industries, and because of this reality, the insurance requirements under the service agreement might become burdensome for the service provider stay in compliance with the originally agreed to insurance limits. In such an instance, the parties can agree to waive or amend the applicable restrictive covenant to provide the service provider with some relief during these uncertain times.
- Notices. As a result of COVID-19, a handful of industries have seen a shift towards working from home. Although most startups are used to working remotely, this sudden change may require updates to the notice provisions in service agreements due to the unavailability to receive notice at the addresses originally included upon execution of the agreement. Generally, notice provisions provide each party with the option to send updated contact information to the other party via written notice. As a protective measure, service providers and customers should consider sending their counterparties a notice via email (or as otherwise available under the agreement) with the updated contact information.
The above list is certainly not an exhaustive list or necessarily applicable to every service provider or customer, however, it provides a general insight and overview of key provisions of master service agreements considering COVID-19.
This material is intended for general information purposes only and does not constitute legal advice. For legal advice issues that arise, the reader should consult legal counsel.
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