Government Emergency Intervention in Private Contracts in Times of COVID-19: A User’s Guide

Summary

This contribution provides a preliminary analysis of the legal instruments that governments use to provide emergency regulation of contracts in the wake of the turmoil resulting from the COVID-19 pandemic. We identify the acute liquidity concern afflicting virtually all agents along the contractual chain in a large number of sectors as the most pressing problem. We then introduce some of the main criteria to understand and design response measures in the area of private contracts in times of emergency: (1) the systemic and urgent character of response measures; (2) keeping things simple, minimising ex ante controls and transaction costs; (3) the urgency of preventing a chain reaction of defaults along contractual networks and the economy at large; (4) the relational value of existing contracts and the ways to preserve it; (5) how tailor-made agreements in M&A and finance have developed over time means to cope with the impact of extraordinary contingencies.

INTRODUCTION

The health emergency associated with COVID-19 has put enormous pressure on the foundations of family, social and economic lives across Europe and the world at large. It has also challenged the resilience of contracts and economic relationships, as well as the consistency and wisdom of the law that governs them.

Understandably, the harsh economic impact that has resulted from the various measures adopted to combat the spread of the contagion and provide health systems with the means and time to cope with the pandemic, coupled with the prospects of an ensuing economic recession have forced many economic agents to figure out how to absorb the losses already suffered or anticipated or, alternatively, to explore ways of shifting – or sharing, if one prefers a more “polite” term – current or expected losses to other parties in existing contractual relationships.

Several means of intervening in ongoing contracts have been proposed, discussed, and implemented in the midst of the dramatic disruption of the normal functioning of society and in the wake of the uncertain future ahead in terms of economic and social well-being. In this contribution, we try to offer some guidance on how to think and implement a number of legal tools that can be deployed to minimise the negative impact of the recent and current disruption following the public health emergency on the functioning of contracts.