In these extraordinary times, many of our organisations are struggling:
- Struggling with losing personnel as increasing numbers of staff are on sick leave or self-isolating as someone they are close to is ill with what’s suspected to be COVID-19.
- Struggling with breaks in their supply chain due to the same reason in partner firms.
- Struggling with the application of different ‘lockdown’ regulations, requests and expectations in different countries (and in some cases, different states within the same country).
- And struggling with communication complications as offices close and more people work from home.
But how much of this is justification for the use of the contractual term of force majeure to alter, minimise or terminate contractual obligations? It is reported that enquiries to law firms from organisations looking at how they can optimise the use of force majeure clauses are soaring – by upwards of 25% for some law firms.
How legitimate are these potential claims and if they are not legitimate, is the only winner likely to be your legal representative?
Lockdown, What Lockdown?
A ‘lockdown’ sounds extreme and quite finite, but the reality is very different. Many countries around the world today are working their way through a lockdown of sorts, but while schools are closed, gatherings banned, restaurants, clubs and pubs are shut by government demand, many other workplaces are still up and running. So, to what degree does this really mean that your strategic supplier may be unable to deliver on their contractual obligations to you?
In the UK the guidance seems, at first glance, to be clear: ‘Only go outside for food, health reasons or work (but only if you cannot work from home).’
But there are a number of factors that muddy the waters. Key workers obviously need to go to work, but who is classified as a key worker? Doctors, nurses, police and firefighters are all clearly essential workers, but what about radio DJs, bicycle shop workers and delivery drivers, who all seem to classify themselves as key workers in the new norm.
And if your organisation chooses to self-identify as a ‘key worker’ workforce, to what degree can your offices, warehouses and factories stay open? Then there is the statement ‘but only if you cannot work from home’, which covers many thousands of jobs, roles and positions – essentially anyone in manufacturing, pharmaceuticals, oil and gas, and more. There can be different interpretations to government advice about staying at home, which can leave it up to personal judgement for companies in the UK as whether or not they stay open should they wish to do so.
Naturally many are choosing to close for the duration, taking advantage of the government’s furloughing scheme and sending staff home. With the government’s advice on this being interpreted in different ways, does this really mean that strategic suppliers can ignore, adapt or end some of the contractual obligations they have to deliver against?
Is Your Supplier Able to Meet its Contractual Obligations?
While many businesses have wound down for the lockdown, corporate lawyers seem to be in greater demand than ever as companies look for guidance on ways to work around their requirement to work, and others look for advice on ways to hold their suppliers to their contractual promises.
The fact of the matter is that this is all happening in uncharted waters; there hasn’t been an event of this magnitude in living memory that has disrupted business on this scale. If we go further back, comparisons could be drawn with the Great Depression in 1929–1939. Organisations are experiencing similar difficulties across the globe and with no firm date in sight for the completion of a vaccine, this is likely to be a boomtime for legal practices and a time of worry and stress for everyone else due to the lack of clarity in most contracts on this type of unprecedented event.
Force majeure usually exists as a contractual clause to help parties to an agreement to adapt or exit that agreement should they be unable to perform their duties due to circumstances genuinely beyond their control. However, what exactly is covered under force majeure depends on both the agreement in question and the country you are in.
So, with all this legal ambiguity, is there likely to be an opportunity for suppliers and clients to take advantage? In other words, are the lawyers in for a field day?
Conclusion – What to do Next?
The first thing to do is to scrutinise how your supplier was performing prior to the pandemic taking hold. The second action, if you have not already done so, is to review your contract terms to identify whether anything in the contract helps you maintain service provision from your existing or alternative suppliers.
Do you know the full extent of your supplier’s obligations under the contract, the detail of the KPIs they are due to deliver on in the foreseeable future and the mechanisms available to you to
(a) help enable them to maintain services – even by instructing an alternative supplier to support the legacy supplier, and/or
(b) draw them back on course if they fall short?
Also, how are your force majeure clauses articulated and what certainty does this provide to help keep the wheels on your service delivery? All this is vital foundational information for you to know.
While knowledge of your contract is vital under any circumstances, so too is the quality of the relationship you have with your supplier. Projects where suppliers and clients work collaboratively, guided by a fair agreement and open communication, may seem rare but they do exist and should be aspired to.
Developing the right levels of commercial trust with your strategic partners is not only a preferable working practice, it’s a sensible strategy to employ on every project as this will help you to
1) identify issues more quickly so they can be solved,
2) work on solutions to issues together instead of independently and potentially in conflict with one another,
3) your more amicable, considerate, informed and collaborative relationship will ensure a fairer solution is pursued by all parties in full awareness of the wider implications of the decisions being made.
There will be suppliers, and clients, who may be tempted to use this pandemic as an ‘excuse’ to trigger the force majeure clause in your contract too soon or for the wrong reasons, to suggest that they are now unable to carry out their contractual duties, to deliver on their outcome obligations.
A closer working relationship, commercial trust and collaboration will help you to identify the validity of their individual claims and it would make sense to investigate the severity of the issues that specifically impact on them. However, it would also make sense to ensure that you are aware of potential force majeure weaknesses that exist in your strategic partnership contracts – to analyse the risks and be ready.
The coronavirus is likely, if it hasn’t already, at some point in the next 12 months to impact your supply chain and you need to be prepared with your response to mitigate any potential for disruption to business as usual.
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