Future Proofing Your Contracts

As lockdown continues for an unknown duration, the commercial world is starting to look beyond managing the immediate impacts of the Coronavirus outbreak and is turning its mind towards planning for the future.

Across a range of sectors, businesses are thinking about the longer-term picture and how to protect their businesses in a world that will be significantly disrupted for a long time to come.  Entering into new contracts concluded against the backdrop of current events, with the possibility of extended lockdowns, secondary outbreaks, and restrictions potentially reappearing later in the year, poses a considerable challenge for businesses.  In this article we consider how to ensure that new contracts that you enter into will put your business in the strongest position.

Force majeure - not just boilerplate

Force majeure clauses have, throughout most of contracting history, been given very little attention, and are generally considered to be part of the standard "boilerplate" wording that sits at the back of a contract. They have previously been a relatively ignored part of a contract, but that is about to radically change.  In the past few months the humble force majeure clause has become one of the most high-profile and heavily-examined of any contractual provision (see Commercial Contracts and Supply Chain FAQ for more information). It can provide a useful tool in managing the risk profile of your future contracts, particularly given that we can expect varying levels of coronavirus-related disruption over the coming months (and likely longer).  Here, we consider key  principles for you to take into account when negotiating force majeure clauses within new contracts:

Definition of force majeure: 

Does your clause refer to epidemics and pandemics?  Consider also referring specifically to the coronavirus outbreak, and to actions taken by the government in connection with coronavirus and future epidemics and pandemics.

What events are covered? 

Force majeure clauses commonly refer to performance being "prevented".  However, in the wake of coronavirus we are seeing many businesses being prevented from performing in full, but still being capable of providing some elements of their service, or supplying reduced volumes, particularly where they rely on a disrupted supply chain.  Consider whether it would benefit you to broaden this wording to say that the clause applies if performance is hindered, prevented in part, or made more onerous.

What are the consequences? 

Typical consequences of force majeure clauses are the suspension of obligations and the ability for a party to terminate.  However, particularly where your supply chain is disrupted, you may think about options such as the ability to cancel individual orders or postpone fulfilment, which will give you more flexibility if your ability to supply is hindered but not completely prevented.

Are foreseeable events included? 

Some force majeure clauses specifically only cover events that are unforeseen.  If you are entering into contracts now, the disruption caused by the coronavirus outbreak and future epidemics and pandemics is clearly much more foreseeable now than it was a few months ago.  You need to consider how any "unforeseen"-type wording affects your ability to rely on the force majeure clause for coronavirus-related disruption and future viruses.

Material adverse change clauses

Force majeure clauses are generally used for events that are beyond the reasonable control of the parties and not foreseen by them.  Given that businesses are now in a position to see, to an extent, the form of the upcoming disruption, and put arrangements in place to mitigate that disruption, this opens up the possibility that the disruption is not entirely outside the reasonable control of the parties.  An alternative approach may be to use the format of a material adverse change clause, which sets out specific events and specific consequences that the occurrence of one of those events may trigger - see Coronavirus: the effect of Material Adverse Change clauses for further detail. For example, if you have concerns about your ability to obtain raw materials required in order to supply your products or services, you may want to specifically deal with that in your contract, and set out exactly what your obligations will be in the event that your supply chain is disrupted in that way.

Payment provisions

The increased risk of businesses becoming insolvent in the wake of Coronavirus means that protecting your financial position is more important than ever.  Carrying out adequate due diligence on the parties you are contracting with, and ensuring that they are stable, established businesses with an adequate amount of assets, can assist with mitigating that risk.However, it is sensible to consider how the payment terms in your contract protect you.  In most circumstances payment terms in a range of 30-60 days are commonly acceptable.  However, from a supplier's perspective, in the current climate 30 days is a long time and much can happen in that period, and you may want to consider shorter payment terms or indeed payment in advance or the provision of guarantees or security.  Of course, from the customer's perspective, making payment in advance creates a risk if the supplier is in danger of becoming insolvent before the goods or services have been supplied.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.