Standard legal procedures have become almost unrecognisable from their state a year ago. What elements in commercial contracts are now receiving greater attention?
By Jean-Marc Pettigrew
For many businesses, existing commercial contracts came under sharp focus with the outbreak of COVID-19 in March 2020. With such a big shift in our day to day lives, some businesses who had previously been trading well suddenly faced a great drop in revenue and were quickly looking for ways to cut costs across the board, which meant taking a closer look at the long-term agreements they were locked into.
Having drafted, reviewed, and negotiated a range of general commercial and technology contracts since the outbreak of the pandemic, what is for certain is negotiating large scale commercial contracts looks vastly different now from how it did pre-pandemic.
This is the most talked about clause in the last 12 months, but it is worth remembering that force majeure can only be relied on in a contract if it is expressly referred to. This is unlike other European jurisdictions where it is a recognised legal term.
When drafting a force majeure clause, make sure the clause is not limited to specific examples. While it’s common practice to list examples of force majeure events (e.g. a global pandemic!), it’s also recommended you include a general catch-all clause too (generally referred to as circumstances beyond a party’s reasonable control).
Some of our supplier clients have found that customers tried to rely on the force majeure clause as a means of excusing the payment of invoices. Economic downturns are not normally considered to be force majeure events, although we recommend specifically excluding payment obligations from force majeure events, to try and prevent any arguments being raised in the first place.
We often see force majeure events being allowed to continue for up to 60, even 90, days before a right to terminate becomes available. If you are a customer, we always recommend that the length of time be reduced as much as possible.
Changes in law
New laws to curb the spread of COVID-19 have become commonplace, so it is important your contracts can deal with these changes. Most well drafted contracts should have some form of change control procedure so that parties can assess the impact of changes in law and how any potential increase in costs can be allocated.
It is a real possibility that certain changes in law may conflict with your ability to comply with your obligations under the contract. Contracts can deal with this through the use of compliance with law clauses, where performance is excused on the grounds that it would result in a breach of applicable law. In the absence of compliance with law clauses, an escalation clause can be useful for dealing with any potential disputes regarding failures to perform.
COVID-19 has certainly made suppliers and customers alike take more notice of business continuity and disaster recovery clauses. While previously not a clause that was cause for much discussion, it is now likely to be something that merits greater scrutiny. Parties should spend time reviewing and discussing BCDR plans and scenarios and how they will be implemented. Clauses assuring that they will be regularly tested, with results supplied to the customer, will also be important to ensure all is in working order.
Audit clauses vary greatly in scope, but almost all of them include a right to inspect the premises of the audited party, in particular premises from where the services are performed. With many places of work now empty following various lockdown measures, premises from which services are performed may be considered to extend to people’s homes. It is therefore worth making sure clauses are expressly limited to premises owned by or under the control of the audited party.
Continuing the working-from-home theme, many information security policies will often include restrictions on accessing data from home or impose requirements on user devices like laptops, tablets and mobile phones. Do you have oversight on what devices are being used by your employees when working from home?
Governance and reporting
It is likely that the COVID-19 crisis had a significant impact on many project timelines over the last few months, so it is important to have a contract that promotes a more flexible way of dealing with delivery issues.
Governance clauses requiring frequent meetings and supplier progress reports can help parties identify and discuss potential issues earlier. Instead of referring to specific dates, agreeing to delivery windows may help settle differences between supplier and customer.
Understandably, suppliers are also often resistant to liquidated damages clauses and termination for missing delivery dates. We find that early warning for late delivery clauses and escalation to senior management can help settle differences, particularly when they reflect what most suppliers and customers would expect with their projects in the first place. (