The coronavirus crisis has impacted clients and strategic suppliers across the globe with supply chains suffering, in often unpredictable ways, from the domino effect of challenges from any one or more organisations rippling out to affect others.
In response this month, the government has set out what it has titled ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’. It covers advice on what both strategic suppliers and clients should consider to be ‘fair and responsible behaviour’ in these times and why consideration of this is so important.
This guidance focuses on contractual relationships and how our approach to them needs to align during the Covid-19 emergency. In fairness, it should be stated that though the recommendations are mostly good practice suggestions, they should largely be applied to any strategic working relationship at normal times, too.
The reason for the government releasing this guidance now is summarised as: “It is recognised that parties to some contracts may find it difficult or impossible to perform those contracts in accordance with their agreed terms as a result of the impact of Covid-19 – including through illness in the workforce, the effects of restrictions on movement of people and goods, revised ways of working necessary to protect health and safety, the closure of businesses or the reduction in a party’s financial resources available to make payments otherwise due under the contractual arrangements.”
As these factors could well impact on your own service delivery, the government believes it is important to recognise a collective approach to determining a best way forward on a contract by contract basis. The aim being to help all parties to a relationship to recognise that it’s in everyone’s best interests to work together on this, to bend and not break, to be flexible to the real-world issues that we are all facing right now, so that when the crisis is over we can get back to whatever the ‘new normal’ looks like as quickly as possible.
Contractual Behaviour – Government Guidance
The guidance suggests that the goal of this group thinking is to attempt to:
- Protect public health, jobs and the economy by keeping existing contracts going.
- Protect the solvency of suppliers and their workforces through the continuation of payments in accordance with the contract.
- Protect contractual health by ensuring flexibility, where possible, and avoiding costly disputes.
- Protect the viability of projects by maintaining good, trusting relationships to ensure a more rapid restart to normality as soon as is possible.
The message of ‘fair and responsible’ contractual behaviour espoused throughout this guidance document is aimed at parties who are struggling to perform their duties where a contract has been materially impacted by Covid-19.
It looks to provide advice on the way discussions and negotiations that ensue, and the ramifications that could result under normal circumstances, should be sensibly relaxed for the ‘greater good’ at the moment.
Specifically, the guidance refers to 15 instances in which this may be the case:
- “requesting, and giving, relief for impaired performance, including in respect of the time for delivery and completion, the nature and scope of goods, works and services, the making of payments and the operation of payment and performance mechanisms;
- requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increased cost or additional performance;
- making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims;
- requesting, and making, payment under the contract;
- making, and responding to, claims for damages, including under liquidated damages provisions;
- returning deposits or part payments;
- exercising remedies in respect of impaired performance, including enforcement of security, forfeiture or repossession of property, calling of bonds or guarantees or the initiation or continuation of insolvency or winding up (or equivalent) proceedings;
- claiming breach of contract and enforcing events of default and termination provisions (including termination rights arising by reason of the insolvency or potential insolvency of a party);
- making, and responding to, requests for information and data under the contract;
- giving notices, keeping records and providing reports under the contract (recognising that the need to keep records of contractual behaviours and decisions, including the behaviours referred to in this guidance, is important);
- making, and responding to, requests for contract changes and variations;
- making, and responding to, requests for consents (including funder consents);
- commencing, and continuing, formal dispute resolution procedures, including proceedings in court;
- requesting, and responding to, requests for mediation or other alternative or fast-track dispute resolution; and
- enforcing judgments.’
Four real-world observations that support the government’s guidance
Being fair and responsible are very human traits. As such, we can look at how people generally react for broader guidance on how we should all be viewing and working to improve the relationships that we are contractually engaged with during and beyond the Covid-19 crisis.
- One failure should not (necessarily) impact on commercial trust
When a strategic partner lets you down, do you immediately execute the escalation provisions in your contract? Or, do you reach for the contract to assure you are more fully informed about the contractual process and options, but then look to identify the most amicable way through the situation without impacting on the commercial trust that has developed?
It’s tempting to expect the worst when targets are missed or promises broken, but it should be remembered that most people will try their best to deliver although occasionally circumstances can conspire to prevent them from doing so.
It may be another linked organisation’s actions, the failure of an individual in the team, or something else that, if known and understood, could be resolved and thus build further trust in your relationship.
Equally, it’s important to have the insight to be able to identify when there are those who are intentionally looking to mislead so they can be dealt with swiftly. To not do so is to open the door to a contagion of such behaviour which will be very unhealthy for the relationship.
So, the lesson here is, treat infractions with an open mind. Lean towards trust, but be wary of those who may look to exploit this as naivety.
- Short-term flexibility may lead to fewer long-term issues
The goal here is to ‘keep the wheels on’ your relationship. Many organisations will be feeling the strain right now and hard-nosed mediation or threats of recourse, even if you are contractually permitted to do so, may well lead to far more long-term issues in both your strategic supplier relationship and the project you are working on.
It makes far more sense to acknowledge the unprecedented circumstances we are living and working through and to offer flexibility by relaxing contract terms and KPIs for a specified period to enable your partner to deliver on their promises.
Before you do so, it is important to develop a hierarchy of needs, highlighting what is required, and by when, so you can build in what flexibility you can and your supplier understands the criticality of their delivery to the new deadlines.
It is also important to make relevant changes to your contract to ensure that the flexibility you are building into your relationship is reflected in the agreement you have between you. Ensure that the amendments you make are temporary in nature, that they revert back to the original terms after a specified period, say 30 days, unless specifically extended, to ensure that lines of communication remain open and that opportunities for abuse of your generosity are minimised.
- When opportunity to do so exists, realign expectations to drive maximum value
When a traumatic event, such as Covid-19, necessitates change, this is the perfect opportunity to determine whether objectives, KPIs and costs are optimised and still as valid now as they were when they were agreed.
When the opportunity arises, whether in a realignment discussion or post Covid-19, it would make sense to engage with your strategic partners in a frank and open discussion about what has changed, what needs to change and what the cost or saving implications of this may be.
4. Lessons learned are a valuable commercial tool
It is always good practice to maintain an overview of what is and is not working in a relationship, and this is never truer than when all parties are under significant external strains as we all are right now.
Keeping such a record can offer many opportunities, including:
- At the conclusion of a milestone or the project, you will be able to look back at the way your relationship has unfolded in order to identify where opportunities were capitalised on or missed. These lessons often go to govern the way you manage future relationships to optimise them for best results.
- As a last resort, should the relationship take an unreconcilable turn, your detailed notes will help you to provide the evidence that your legal representatives will require in their arguments.
- This is a great opportunity to learn, adapt and improve. The strains many organisations are currently under are more severe than usual, and this will often lead to greater, bigger and bolder innovations which often positively impact you going forward.
Suppliers and clients across the public and private sectors will be being impacted by the current crisis to varying degrees. Staff sickness, lockdown limitations, geographical or logistical challenges or a million other issues may impact on your strategic partner’s ability to deliver on their contractual obligations.
The government’s latest guidelines look to take a pragmatic approach to this. It suggests that a degree of flexibility and lenience on strict contractual measures should be the way forward, and due consideration given for the long-term impact of coming down too hard on partners who may well be doing their very best in challenging circumstances.
These guidelines are well worth a read, not only because they make perfect sense in the current climate, but because they are good practice even after the threat of Covid-19 has subsided.
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