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Due to the COVID-19 pandemic many businesses will have contracts that they were prevented from completing or chose not to complete. But what are the consequences of not honouring your contractual obligations? Below are some questions boards should consider when reviewing the impacts and consequences of these decisions.

How will boards assess the implications of not honouring contract obligations?

Being alert to the impacts associated with this strategy may include tracking these implications:

  • financial – penalties, loss of business, compensation, legal fees;
  • reputational – loss of trust in the business, impacts on credit scoring assessments;
  • operational – supply chain implications; or
  • workforce morale – a workforce already under pressure from COVID-19 restrictions is likely to be more fragile and any negative impact could be magnified.

Scenario modelling can help determine a range for the likely scale of impacts and assist in forming your judgment.

How will boards deal with potential impacts?

A strategy may seek to maximise positive impacts while minimising the negative impacts of not honouring an obligation.

Where the impacts could be material, an appropriate communications strategy is key. The strategy could explain what the business is doing, why, and how it is working to mitigate the effects on the contract counterparties. Appropriate messaging can provide a balanced view of how the business is managing the disruption and provide some level of comfort to stakeholders.

In scenario planning the board should be prepared for the eventuality that a court intervenes to enforce performance of the contracts.