Institutional investors wary over rise of ‘Covid clauses’

There is a growing focus on wording contracts to try to ensure protection from future pandemics, but the trend has sparked questions over the effectiveness of such efforts.
Institutional investors wary over rise of ‘Covid clauses’

Parties to investment deals are increasingly wording contracts to try to ensure that they are covered in the case of a pandemic, but some asset owners are unconvinced about the legal force or even necessity of such clauses.

The motives for taking such action is understandable, given how transactions have been renegotiated or even cancelled in the past year, notably in sectors hit hard by the lockdowns. Take Mirae Asset’s withdrawal from its purchase of Strategic Hotels & Resorts from Chinese insurer Anbang or reports of pension funds suspending investments into Indian infrastructure.

“We are seeing a very specific focus on updating documents to ensure adequate protection for pandemics moving forward,” said Effie Vasilopoulos, Hong Kong-based co-leader of the investment funds, advisers and derivatives group at law firm Sidley Austin.

Some asset owners are noticing this trend too.

Graeme Torre, Asia Pacific head of real estate at Dutch pension fund manager APG, said: “Some people are taking extra caution around documenting their commitments... We’ve seen leases, joint-venture agreements and all sorts of transaction documents now include pandemic incidents, under force majeure.“

Force majeure clauses alter obligations or liabilities in the case of events outside the reasonable control of any party, such as war or a natural catastrophe.

Effie Vasilopoulos: Rent
obligations are a Covid issue

But it is not yet clear how “pandemic” is to be defined, said Torre, declining to comment on whether APG had requested such clauses or was likely to.

A real asset investment specialist at a Korean public fund relayed similar uncertainty over the issue of pandemic-related documentation. He said that he had not yet seen any ‘Covid clauses’, possibly in light of his institution’s relatively low level of investment activity in recent months.

“I would expect our first thought would be to try to avoid [such changes to contracts],” he said. “A buyer or seller will probably not want to put in something new because they will not know how it will affect [a transaction] in the end.

“But maybe it will become market practice,” the executive added. “If it does, I guess we will have to accept it.”

Vasilopoulos acknowledged that there were legal complexities and considerations involved that must be considered on a case-by-case basis. There are, typically, already provisions in contracts for transactions – particularly those involving the physical economy and movement of goods and people – to remove liability for force majeure events.


But it is not clear that a pandemic can constitute such an event and therefore form a justifiable basis for non-performance under existing contract terms, she said. In many transactions, “this has not been adequately addressed and is a factor in the spike in disputes and litigation that we are currently seeing as a result of the pandemic”.

As a result, there is increased focus on the specific contexts in which it is appropriate to void obligations in the event of a pandemic, Vasilopoulos added. “These cases are intensely fact-dependent.”

She pointed to rental obligations as one area of consideration. “Many tenancy agreements do not permit an abatement of rent due to a pandemic. New contract negotiations are testing the limits of relevant exclusions with similar events in mind.”

Insurance coverage has also been an area of focus, as new contracts are renegotiated with such events in mind, Vasilopoulos added. “Premiums for any pandemic-related coverage granted are expected to rise significantly.”

All this being said, the chief investment officer of a large Hong Kong-based group questioned whether the insertion of or changes to legal clauses would really help parties to deals.

He saw it as a bigger question of how Covid affected the thinking on certain types of investments and whether they should be made in the first place, rather than whether parties seek to cover themselves.

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