These are unprecedented times with much uncertainty for businesses, particularly those in the supply chain sectors, such as logistics providers, manufacturers, providers of mechanical equipment and customer facing service providers. Whilst you cannot meticulously plan for the unforeseeable, you can be as prepared as possible for what may come.
Contract due diligence
- Allocate staff to carry out contract due diligence.
- Identify all key supply chain contracts within your business. Understand whether any contracts are interdependent (e.g. is the ability to perform obligations under a contract dependent on the supply of goods or the provision of services by others?)
- Know who is responsible for the day-to-day management of key contracts within your business and that of your customers and suppliers.
- Ensure the key contract terms are understood:
- What is the governing law of the contract?
- What are the production / supply demands? Are there specific quantities and times for delivery?
- Does the contract contain service levels and prescribe penalties for non- or delayed- performance, such as service credits?
- Are there any mechanisms built into the contract to allow for renegotiation or variation of terms?
- Is there an express force majeure provision?
- What are the provisions concerning dispute resolution e.g. arbitration?
- Do you have a business continuity plan that is business or contract specific?
- Make sure key personnel know the triggers for commencement of the plan and understand their obligations.
Know your insurance cover
Dedicate a staff member or team to review your insurance policies. Such reviews should identify what type of loss they cover, the limits of any cover, and how to commence a claim. In particular, check for any coverage which may be applicable to COVID-19 situations, such as:
- inability to access premises due to, for example, government measures regarding lock down or the mandatory vacation of premises to be used for other purposes
- the failure or under-performance of utilities, such as broadband
- loss of attraction, meaning loss of turnover / profit in certain circumstances
- notifiable disease, leading to closures or restrictions that would inhibit normal business functioning
- credit or event cancellation
- travel cancellation or port closures
Unavoidable non-performance or under performance
If your business is unable to meet its contractual obligations, consider what measures can be taken.
- Does your contract have a force
majeure provision (ie a provision temporarily or permanently
excusing the unforeseen or unavoidable non- or delayedperformance
of a party under the contract)?
- What does the clause cover and how is
it triggered? For example, does it cover epidemics, pandemics,
global health events, outbreak of disease or similar, government
action mandating or resulting in the closure or temporary
suspension or reduction of premises, supply chain or necessary
workforce, interruption of utilities, shortage of labour or
materials or other disruption of supply chain?
- Do you have an obligation to continue
paying for services if your counterparty wishes to rely on force
- Can you demonstrate that the impeded
performance of your obligations is a direct consequence of the
force majeure event?
- What are the notification
requirements under the clause?
- Does the clause specify a specific
time for which impeded performance may continue before either party
has a right to terminate the agreement?
- Can you demonstrate that you have
attempted to mitigate the impact of the force majeure event?
- Can the provisions of the force
majeure clause be waived and is this something you may wish to
consider (e.g. renegotiation of terms as opposed to termination of
the relationship)? Consider the ramifications of accepting,
rejecting or waiving the force majeure, seeking legal advice
where appropriate. In particular, consider any interdependent
- Note that increased costs of or lower returns from performance may not always justify reliance on force majeure provisions.
Practical steps to mitigate loss / damage
It is important to keep customers / suppliers abreast of performance issues. However, you may wish to seek legal advice in advance of such discussions.
Would it be reasonably possible to:
- Re-allocate staff and resources?
- Agree to vary or renegotiate contract terms with your counterparty? For example, could performance be delayed or rescheduled, prices varied, substitute or alternative products and materials used?
- Consider a compromise. Try to preserve future goodwill and relationships where possible.
Termination of contracts for breach
Make sure you understand the termination provisions under key contracts in respect of breach of contract, including material breach and persistent breach provisions, when they are triggered and the consequences of terminating the contract should you or the counterparty invoke the provisions.
It is possible that your commercial arrangements could turn contentious. Knowing the dispute resolution terms of your contracts is essential but seek legal advice early and start keeping good records today. Ensure problems with supply are noted in detail, alongside the events that have caused such problems (e.g. have government restrictions been imposed on transport or required labour reduction in the workplace and how has this directly impacted your ability to meet your obligations?).
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.