Coronavirus: Tips for managing contracts now and avoiding future disputes
COVID-19 is providing daunting challenges for all in business. Disruption is inevitable, as we all work out how best to move forward as the impact of COVID-19 spreads. Our Commercial Contracts and Supply Chain FAQs give useful guidance on some of the key clauses in contracts to review in the current environment.
In this note we focus on a slightly different angle, by thinking more commercially and proactively about the issues posed by COVID-19. There is no “right” answer to manage the challenges posed in unpredictable times, but early contract review and engagement with key customers and suppliers can enable businesses to manage their continuity strategy, mitigate risks and build a stronger, more collaborative basis for their business, whilst avoiding further cost and disruption through disputes, when the dust has finally settled.
So, below, we share our top tips for managing your contractual relationships and minimising the risk of future disputes:
1. Take a holistic approach to your contracts and your relationships with key suppliers and customers. All businesses are facing a time of enormous disruption and uncertainty. Working together to find potential solutions that provide business continuity and certainty now, and ensuring that those solutions are agreed and properly documented, may help to avoid costly disputes when the dust has settled and build the foundation for a more collaborative and beneficial future working relationship.
2. Review your contracts now: know your contractual entitlements and obligations, and those of your counter-parties to ensure you are making fully informed decisions. Don’t forget to consider boilerplate clauses. In addition to the much discussed force majeure clauses (on which, see our Commercial Contracts and Supply Chain FAQs, look out for:
- The contractual commitment itself: is one party actually required to supply, or to purchase, products or services? Or do those obligations only arise when one party has submitted a purchase order which has been accepted by the other? Does your contract contain minimum purchase requirements? Or guarantees about supply levels or delivery times etc.? Are there procedures to deal with delay, rescheduling, extensions of time etc.? If the contract contains a mechanism for the extension of time which you might need to rely on then this should be followed to the letter.
- Are appointments exclusive, or can one party go elsewhere, either generally, or where their counter-party is unable to fulfil orders or otherwise perform?
- Price – if costs are rising, is there a relevant price adjustment mechanism? These are more common in longer term contracts.
- Payment delays – what are your payment terms? Might you need to seek to negotiate an extension of credit? If your customer is facing cash flow difficulties, what might you do to mitigate your credit risk?
- Material Adverse Change provisions: more common in finance documents and business sale transactions.
- Express hardship clauses which may entitle suspension, or variation, in circumstances of economic change which do not constitute force majeure events.
- Clauses that allocate risk in relation to changes in law or regulations.
- Compliance obligations with health and safety and other applicable regulatory regimes.
- Key personnel clauses specifying that certain people are required for certain commitments: are those individuals still available to perform?
- Business Continuity Obligations – is a party required to implement business continuity arrangements in the event that they foresee or face disruption to their business? If so, understand what is required and keep an audit trail of compliance.
- Might you need to prioritise supplies to key customers, or those in certain essential industries? Do your current customer contracts allow you to do this?
- And don’t forget the “boilerplate” clauses:
i. What is the governing law in cross-border contracts: this will determine the legal rules that apply to the interpretation of the contract: force majeure, for instance, is a statutory right in many civil law jurisdictions (including France and China, with both having declared that COVID-19 is a force majeure event under their own laws, with China issuing governmental certificates to confirm this) whereas in England and Wales it is a contractual remedy.
ii. What does the contract say about variation and amendment? What are the formalities that need to be complied with?
iii. Does the contract contain a waiver clause?
iv. The dispute resolution clause will set out how, and where, any dispute between the parties that does arise should be determined.
3. Understand the alternatives – if, for example, the services/goods cannot be sourced or sold elsewhere, then this will factor in how you might wish to approach the situation with your counter-party. Termination might not be appropriate, even if it is available as an option, or the current situation may provide you with a rationale for terminating an unsatisfactory relationship. Take care when looking to terminate a contract: ensure you have valid grounds for termination and that any notice requirements are followed to the letter.
4. Start a dialogue with your key suppliers and customers now about the current situation and the potential impact on your relationship. Keep contemporaneous records of all discussions and decision making processes so that you have the evidence to fall back on later, should you need this and ensure that all discussions, meetings and communications (including emails and other electronic messages) are expressed, and understood to be, on a “without prejudice” and “save as to contract” basis unless and until a formal agreement is reached.
5. If you agree to vary the terms of your contract, then document the agreed variations. Ensure that any contractual requirements concerning variations are complied with: often variations need to be in writing and signed on behalf of each party.
6. If resolutions are reached where there have been contract breaches, these should be properly documented in a settlement agreement to ensure that the terms of the resolution are clear.
7. Monitor performance against agreed contract terms (and any agreed variations) so that issues and potential issues are spotted early, and contingency plans can be implemented in a timely manner.
8. If you are struggling to fulfil your obligations and/or your relationship with your counter-party is already difficult, or if you are looking to bring the relationship to an end (even for other business reasons), then speak to us quickly to ensure that you do not compromise your own position.
9. Understand and implement escalation and dispute resolution procedures as required by the contract terms at the appropriate times.
10. Notification provisions under the contract should always be followed strictly and meticulously.
11. Check any potentially applicable insurance policies – business interruption is probably the most relevant type of cover, but consider also other insurance policies that might be relevant (if you have them), such as credit, professional indemnity, property and environmental insurance. In all cases, it is essential, where you think that you may have cover, that you notify your insurer promptly and in strict compliance with the notification requirements under the policy. See also our FAQs on Business Interruption Insurance.
Keep full and accurate records: If you are intending to rely on a contractual clause to suspend or vary performance, or to make a claim under an insurance policy, then it is vital to retain full records to prove the facts justifying your actions and evidencing any losses and mitigatory actions taken. The crisis is evolving daily, but disputes about what was done might arise many months, or years, later, at which point it will be very difficult to reconstruct what was done at the time and in a moment of crisis without detailed contemporaneous records. It is also important to document the steps taken to mitigate the impact of COVID-19, the alternative options that were considered (or the lack of them) and the basis for final decisions.
If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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