Covid-19: Economic programs and effect on contracts

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Newsletter

Published 05 May 2020
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The COVID-19 pandemic was for the general public and commercial players in the TMT sector an event that was not reasonably foreseen and has had a wide variety of unavoidable negative effects. Even though many TMT services have seen a surge in usage, such as streaming services, video conferencing platforms, online trade, home delivery, internet and mobile data usage, the effects short term vary greatly, in particular related to economic model applied. For paid subscription services, the effect is low, at least in the short term. It does however even for such services remain to be seen if increased unemployment may lead consumers to cut spending on the numerous services which must be subscribed to in order access the most popular content.

Tumultuous capital markets leading to great shifts in exchange rates has also almost offset the effect of revenue increase in USD for the global leader Netflix. The marketing budget is typically the first to be cut as businesses reduce spending. This has had a great negative effects for advertising financed platforms.

In this article we point to the main government initiatives to mitigate the negative effects and the impact of the pandemic on contractual positions, both contracts entered into before the pandemic and contracts entered into subsequently.

Government programs

Among the first actions of the government was to relax employers obligation to pay employees subject to temporary dismissal from 15 to 2 days. This has, as expected, been used by a large number of businesses to cut labor cost when business is closed or otherwise negatively affected.

The government of Norway has relaxed deadlines for payment of VAT and taxes to avoid increasing liquidly burdens on businesses. Availability of loans to businesses has been improved by the state providing guarantees to banks. Loans to SMEs are also available through Innovation Norway. Note however of interest to international businesses that the definition of SME is applied on group level and not on the Norwegian subsidiary in isolation. A package of NOK 2.5 billion is made available to start-ups and growth businesses. The package includes increase loan sizes and reduced limits for equity and pledges. Project financing is increased from 50 % to 75 %. Start-ups with international potential and at least one external investor and external board members may qualify for up to NOK 750 000 of support for specific projects.

The single most important aid package is however the compensation for unavoidable fixed cost for businesses which have lost at least 30 % of their turnover month on month 2019 to 2020 (20 % for March). For businesses required by law to close, the compensation is at 90 % and for other businesses approximately 80 %. The compensation is provided through an online platform and payments made swiftly, typically within days.

In addition to the programs for economic aid, the government has quickly introduced a new legal instrument similar to chapter 11 protection under US law. Distressed Norwegian businesses may under this new legislation reach more flexible negotiated solutions with creditors and prevent bankruptcy.

Contractual effects

The effects of COVID-19 on existing contracts must be sought through interpretation of the contract. There is typically little doubt that the pandemic according to Norwegian background law qualifies as force majeure (FM), an international doctrine applying in Norway. The doctrine of FM is very similar to the concepts of defective assumptions (Norwegian: bristende forutsetninger) and contractual revision due to unreasonableness (Norwegian: urimelighet / avtaleloven § 36). These principles have their Anglo-American equivalence in contractual frustration. Unless the contract clearly sets out the contrary, it is assumed that these principles may generally be applied in the contractual relationships.

The typical effect of FM and its similar concepts is the excuse of the party to perform (real debtor) from its inability to do so according to the requirements of the contract. Whether the excuse extends also to preventing the recipient (real creditor) from terminating or claiming damages must be based on interpretation of the contract. It is assumed that the threshold to claim FM is somewhat higher in single purchases of goods and services than it is for longer term contracts. It is also of relevance whether performance is legally prevented or just made more cumbersome. A further distinction must be made in instances where the pandemic has direct effect on the performance and instances where the real creditor's need to receive the contracted performance is affected, such as a business owner who no longer has the need to receive services as most employees are working remotely. In any circumstance, the effects of FM do not apply directly, but must be claimed. It is therefore of utmost importance to notify contractual partners of the effect the pandemic has on the contract.

For contracts to be entered into, the effects of the pandemic must be addressed specifically and to a much greater detail than what is found in most standard contracts. The whole point of FM is that the event was reasonably unforeseeable and avoidable, which may no longer hold true.