As we write, the COVID-19 pandemic is having a profound, and profoundly unpredictable, effect on the economy. We profess no knowledge as to what lies ahead, or the timetable on which it will unfold. Indeed, this unknowing is precisely what led us to produce the model standstill and tolling agreement we describe below (and which you can access here in an annotated version and here in a version without annotations).
The current uncertainty will lead businesses to conserve cash if they have it or to miss scheduled rent or other payments if they don’t, resulting in what could be massive cascades of defaults. Some, perhaps many, will be tempted to take legal action, whether in the form of collection suits, bankruptcy, or a combination. And yet the very courts they approach may be swamped by the continuing crisis. Even where payment obligations are secured, in many instances it seems doubtful that exercising rights against collateral would meaningfully improve a secured party’s position vis-à-vis its debtor. Mass foreclosures would be economically suicidal.
We believe that negotiated resolutions are in most cases preferable to those that are litigated. At the same time, we believe it is particularly unlikely that parties will divine, let alone agree upon, optimal resolutions until they can look to the future with greater certainty. We recognize that many businesses—especially those that are small or medium-sized—may not be in a position in this time of severe economic disruption to retain counsel to provide the advice and representation that they need to produce an acceptable, temporary workout that obviates the need for litigation and, ideally, preserves a productive economic relationship.
We’ve prepared a model standstill and tolling agreement that can serve as a basis for addressing these problems. It is intended to be a template for businesses facing problems of performance under contracts, including payment or collection, which may soon be overwhelming to the parties, and to the legal system. It contains the basic elements that such an agreement should include, and so provides a balanced way for businesses to place a legal “freeze” on their commercial relationship while the economy stabilizes. This model agreement is, needless to say, neither intended as nor a substitute for legal advice. All users are encouraged to retain counsel when possible.
In substance, the model agreement identifies “standstill issues” and stipulates a “standstill period” during which the party owed the salient performance agrees not to seek certain remedies, and the party owing the salient performance agrees that it will not undertake a range of non-ordinary course acts that may ultimately harm the other party. It contemplates that certain obligations, e.g., for partial payments or provision of some goods or services, may continue during the standstill period. It provides suggested remedies in the event that either party breaches. In a nod to practicality, the model agreement explicitly contemplates the possibility of traditional or electronic execution, and provides a mechanism for specifying the manner in which notice should be given by either party to the other – particularly helpful in this time when so many businesses are closed or being conducted from remote locations rather than their usual locations.
In extraordinary moments like these, we may feel the need to do something, to act—if only to counteract the sense of powerlessness we feel in the face of severe uncertainty. While there are many important things we can all do to ameliorate the current crisis, commercial litigation is unlikely to be one of them, at least in the near term. Rather, creating space and time to communicate—to adjust or forgive obligations; to create new, more plausible ones—is a critical precondition to economic restabilization and, we hope, growth.
This article was originally published in the American Bar Association’s Business Law Today.
Jonathan C. Lipson is the Harold E. Kohn Professor of Law at Temple University Beasley School of Law, where he teaches Contracts, Bankruptcy, Corporations, Commercial Law, Lawyering for Entrepreneurship, International Business Transactions, and a variety of other business law courses. Professor Lipson is a member of the American Law Institute and a Fellow in the American College of Commercial Finance Lawyers, and is active with the Business Law Section of the American Bar Association where he is currently a member of its Council and, from 2011 to 2017, was Section Content Officer.
Norman M. Powell is a partner in the Delaware law firm of Young Conaway Stargatt & Taylor, LLP, where his practice includes formation of and service as Delaware counsel to corporations, limited liability companies, and statutory trusts, and the delivery of legal opinions relating to such entities, security interests, and other matters of Delaware law. Mr. Powell is a member of the American Law Institute, the immediate past-president of the American College of Commercial Finance Lawyers, a member of the Permanent Editorial Board on the Uniform Commercial Code, and is active with the Business Law Section of the American Bar Association, for which he currently serves as Section Content Officer.
The views expressed herein are those of the authors and are not necessarily those of any organization with which either of them is affiliated.