The focus on the far-reaching effects of coronavirus appears to have shifted from healthcare worries to economic woes, with the financial impact creating a period of instability, particularly throughout supply chains.
With more sectors looking to get back to work, it is hardly surprising that businesses in survival mode are looking to protect their interests and reduce risks, with a review of their existing commercial contracts essential.
Few contracts will have been written to mitigate the risks of a global pandemic, with months of lockdown and social distancing, but understanding its impact on commercial relationships and the ability of a business or its suppliers to fulfil their contractual obligations, is currently key.
Businesses have to be close to their suppliers and customers, like never before, taking their time to understand the pressures everyone is facing in the current climate and the impact a failure by any member of the supply chain would have both commercially and practically.
Key contractual points
The relationship between a service provider and their customer is typically completely different from that defined by a standard supply of goods agreement. Personal interactions are often critical and maintaining the relationship is essential to the success of the service.
From the provider’s perspective, whilst it is critical to ensure that exposure is as limited as possible in the current economic climate, it’s equally as important to ensure the customer does not feel exposed by any new approach to the service provided.
Working hard to mitigate costs and actively coming up with proposals, will stand the relationship in good stead, whilst enhancing the feeling of mutual trust between the parties.
In terms of the contract itself, the first important consideration is whether it contains a force majeure clause and if so, does it extend to the impact of the pandemic?
Whilst a service provider should certainly consider this clause and whether the current circumstances could trigger it, they must ask themselves if it will be in their long-term interests, as it could lead to an immediate termination of activity.
How to address the necessary variations
Instead of jumping straight to the triggering of the force majeure clause, it may be possible to make use of the variation provisions in the contract. This will enable any additional costs incurred to be recovered by the service provider.
If the costs incurred under the contract are driven by people costs and if it’s possible to flex resources, but have additional costs picked up by the customer, this would be a sensible option.
For example, the service provider may be able to recover redundancy costs in some circumstances, if the contract allows it.
Some contracts will have a formal change control procedure which sets out the process to be followed and it would be worth checking to see whether the customer is entitled to withhold its approval of any changes proposed.
The critical point here is to try and find a way of ensuring that a contract remains financially viable. The contract will usually set out how a variation should be documented, but even this can vary.
If the contract is silent in this respect, then the accepted position under English law is that any variations would need to be agreed between both parties, rather than imposed by one or the other.
When variations to the contract are agreed, these should be documented carefully, detailing whether they can be agreed verbally or whether they need to be in writing and signed by both parties.
It’s always good to talk…
In May 2020, the government released guidance it hoped would encourage organisations whose contracts have been impacted by the coronavirus crisis to behave fairly and responsibly in relation to performance issues and contractual enforcement.
Whilst the guidance has no legal power, it calls for parties to act proportionately when dealing with disputes and to collaborate to find solutions that are fair to both parties and consider each party’s financial resources.
The single most important issue for service providers, is not necessarily the contract itself but the ongoing relationship with their customer. If there is any risk a business might not meet its contractual requirements, the best thing to do is open a dialogue as quickly as possible.
Given a good working relationship and a customer who may also require flexibility, then collaborating to find an equitable outcome, with the contract as the foundations for that relationship, businesses could emerge from the crisis in an improved position.