In part one of this article, I discussed five considerations for negotiating and drafting contracts during this period of continuing commercial uncertainty resulting from the COVID-19 pandemic.
Below are five additional considerations for negotiating, drafting and executing contracts during these uncertain times:
1.Term and Renewal.
Present global uncertainty will likely make it difficult for some parties to settle contracts, let alone agree on contractual arrangements that will be in effect for longer periods of time. Therefore, at this time shorter contract terms may be preferred over longer terms. Similarly, auto-renewal clauses may not be appropriate if parties will need the opportunity to consider the state of their industry and the overall economy before committing to a subsequent term. On the other hand, with shorter term lengths it may be preferable to include renewal rights providing that only some contractual terms will be renegotiated (for example, pricing or quantity) to ease the administrative burden of having to agree upon an entirely new contract. The considerations will vary from contract to contract, but in general businesses should be cautious to ensure that term and renewal clauses are agreed upon with appropriate consideration of the changes which might occur during the life of the contract.
Contracts often include early termination rights in favour of one or both parties. Termination for convenience allows a party to terminate the contract for any reason at all, typically upon providing written notice a certain number of days in advance. Termination upon default (or "for cause") allows a party to terminate the contract following the other party's default, either immediately or after a certain number of days available to the defaulting party to remedy or "cure" the breach. The termination provisions in a contract will likely be carefully considered as parties seek to maintain their desired level of flexibility during uncertain times or attempt to hold others to their contractual commitments. If specific clauses will be included in a contract to address issues related to COVID-19 (discussed in part one of this article), it will be important to ensure that these clauses align with the defined events of default to avoid confusion.
3.Pricing and Payment Terms.
No doubt many businesses have experienced challenges in determining pricing this year. For example, supply chain disruptions might require consideration of the increased cost of inputs in negotiating pricing terms. With contracts that have typically included minimum volume or minimum spending commitments, it may be necessary to re-evaluate the viability of these commitments during this ongoing period of uncertainty. Similarly, careful attention should be given to payment terms as we move forward cautiously: among other things, the payor may seek additional time to pay, while the payee may want to know sooner that a payment default has occurred to limit losses by pausing the supply of goods or services.
COVID-19 demonstrates that it is very difficult to plan for every possible situation that could arise during the life of a contract. With the possibility of further pandemic-related barriers to contractual performance and resulting disputes, the parties may wish to direct more attention to the drafting of a dispute resolution clause. Parties who were happy in the past to settle disputes through litigation may prefer the expedience of alternative dispute resolution options such as a mediation, arbitration or the referral of issues to an expert; or the inclusion of a designated process for negotiation between the parties before disputes proceed any further.
Finally, COVID-19 has provided the perfect reminder (and for some, a painful lesson) on the importance of the "boilerplate" clauses in a contract: the string of general or miscellaneous clauses that often appear at the end of a contract. These clauses do have important effects on the rights of the parties and the interpretation of the contract. Of course, the boilerplate clause getting all the attention this year is the force majeure clause; however, the general lesson is that these clauses can all have important contractual implications and should be given sufficient consideration and drafted to appropriately reflect the intended commercial arrangement in each contract.
The ten considerations discussed in this blog series are not an exhaustive list, but rather a selection of issues which may be relevant to COVID-19 era contracts – as well as some encouragement to approach contracts with the same critical and adaptive mindset that has been required to overcome the challenges resulting from the pandemic.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.