Contract language is sometimes overlooked, often boring, but always critical when the unexpected happens. Companies worldwide are learning that lesson because of the Coronavirus disease (COVID-19) pandemic. Force majeure used to be an arcane concept in a lonely clause near the end of many contracts. The pandemic has elevated its importance and made companies reassess what their current language says and whether they should change it going forward.
Force majeure is just one example of how contracts can play a critical role in building resiliency. As companies reexamine their supply chains and risk management strategy, it is important that they take a fresh look at their contracts as part of that assessment. By carefully analyzing force majeure clauses, building resiliency in other parts of contracts, and streamlining the overall contracts process, companies can better navigate the remainder of the pandemic and put themselves in a stronger position for the next unexpected supply shock.
Evolving uses of force majeure
Many companies turned to their contracts’ force majeure clauses to try to stop the bleeding in the early stages of the pandemic. Historically, an event that would trigger force majeure has been considered “an act of God.” There is a growing mountain of analysis about whether COVID-19 applies.
A lot of the clauses before this spring did not specifically say anything about an epidemic or a pandemic. Some set an incredibly high standard to trigger force majeure, such as it being “impossible to perform” the contract. Others set a more lenient standard of hindering performance.
For businesses still fighting over these clauses, there are two things to keep in mind. First, it can be valuable to have experienced contract attorneys analyze the contract’s exact language and offer perspective on what similar language has meant in other disputes. Second, be prepared for a language compromise that makes business sense. An overly protective clause may cause the contracting process to get hung up in unnecessary negotiations.
The best-written clauses set up that compromise by specifying when and why a company has an excuse to delay performance, but without leaving the other company high and dry. All companies should reexamine their force majeure clauses going forward and make sure they get proper attention in the next round of contract negotiations.
Keep in mind that the adjustment likely isn’t as simple as adding epidemics or pandemics to the old clause. Some clauses also specify the event needs to be “unforeseeable” or “uncontrollable.” At this point in the pandemic, is it unforeseeable that COVID-19 could cause new bottlenecks in supply chains? Is a COVID-19 outbreak at a factory uncontrollable? Companies need to think through a variety of scenarios as they adjust their force majeure clauses.
Building resiliency in other parts of contracts
It is equally important that the adjustments do not stop with force majeure. Businesses are wise to take a fresh look at other clauses in their agreements to build in resiliency. Termination provisions are an example. How easy is it to terminate the contract? What happens at that point? Are there liquidated damages or termination fees? A carefully crafted termination provision can give the parties more room to adapt.
Some buyers have also begun including safety stock requirements in their contracts. Examples include requiring sellers to hold a larger inventory of the manufactured good in question, or to provide reasonable assistance in moving to another manufacturer if certain problems arise. In some cases, buyers are requiring manufacturers to keep enough personal protective equipment (PPE) on hand to avoid that being the reason a facility closes or slows down. The idea is to think through what could cause problems – in the pandemic or otherwise – and to build contingencies into the contract.
Of course, whether companies will agree to those provisions often comes down to who has the most leverage. The more leverage a company has, the more it can limit its risks. Still, all companies can better limit their risks through careful thinking and negotiation across a variety of contract clauses. They should also analyze beforehand which contracts pose the biggest risks, which products would be the hardest to secure elsewhere in a pinch, and which would be the easiest? Which have the highest potential for supply chain interruptions? Performing this type of analysis will help companies identify which contracts and clauses need the most focus.
Streamlining and automating the contracts process
Now is also an excellent time for businesses to step back and take a look at streamlining and automating their contracts process. How should standard forms and clauses change based on the adjustments described above and other unexpected interruptions? What are the essential clauses for every contract going forward, and in which types of contracts are adjustments more important than others? Investing in this analysis near-term will pay long-term dividends.
Automation can make that analysis more efficient, both now and when the next unexpected shock happens. There are software solutions that make it easier for companies to select particular clauses for their new contracts and to search for key language in their existing contracts. These solutions become even more valuable when companies have identified the terms that are truly key for them. Then companies can quickly comb through their current contracts to see what needs attention, what may need to go back to the negotiating table, and what to replace going forward. When the next challenge arises, they can use this automation to revisit force majeure, termination, and other key contract provisions at an even faster pace.
That kind of automation is especially useful when in-house legal teams are short-staffed. The more streamlined the contracts process is, the faster business leaders can explore their options and adapt. As they roll out automation, businesses can find it particularly valuable to partner with outside attorneys who have experience with software solutions and key term analysis.
Just as a winning baseball team sets a game-plan for handling this or that pitcher or batter, companies should have a plan for how they will analyze and adjust their contracts as the pandemic continues. Reexamining force majeure and other contract provisions should be part of that plan, as should exploring options to automate more of the contracts process. Taking these steps will help companies ensure that contracts are a fundamental part of their risk management strategy, rather than something that gets in the way at the next unexpected supply chain interruption.