COVID-19 has caused a global disruption to supply chains. This is an unprecedented event and has caused severe financial pressures to most enterprises.
Consequently, this situation is causing many companies to critically review their contracts, whether with their customers or vendors. They would need to understand if there could be risks that could affect them further or whether there could be certain clauses that could be used to some benefit.
Contract management and the importance of the legal support teams has never been more important than now.
Keeping this in mind, there are certain aspects that enterprises should cover while reviewing their contracts.
- Identify the important contracts and key clauses/terms:
Identify those contracts that are critical to your business and to keep operations running. From the customer side, these could cover the provision of important services or products. From your vendor side, it could be the receipt of vital products and services. There may be third-party contracts as well, for example those related to employee insurance – that could come under these categories.
Once you identify the key business relationship that is critical to your organization functions, pull out the respective contracts and scan them thoroughly.
Check for the presence or absence of key terms or clauses that can impact your business operations.
Some indicators to look out for would be Force Majeure Scope, Termination/Breach clauses, Supplier Exclusivity, Supplier (whether it is your supplier or if you are the supplier) performance and non-performance clauses, Payment terms, Price Changes, Minimum Order Quantities, Notice period, Scope of Contract, Limitations/Exclusions, Change in Law (which can affect contract) etc.
- Impact to your suppliers:
Engage in an open and frank discussion with your suppliers. Understand how the Covid-19 situation is affecting their business and their ability to provide you the required contractual deliverables. Taking positive action early on to understand the full picture from your supplier side is important because of the domino effect it has on your ability to run your business and cater to your customers.
It would be a good practice to create a supplier impact statement drawing inputs from all your suppliers and consolidating it across your organization to get a true picture of the impact to your business due to challenges faced by your suppliers during this situation.
- Impact to your organization due to supplier challenges
Once you have the consolidated picture of your suppliers and their challenges, it is important to now properly gauge the impact to your business. The impact to your organization as a result of supplier challenges would be a function of some of these parameters:
- Is the supplier able to get what it needs to support you?
- Can they manage supporting you with a remote workforce? Are they required to work on premise, and have they set up adequate systems to ensure this?
- Do they have enough financial strength to tide this situation, or could they be at risk of shutting down?
- Impact of regulatory changes on their business and ability to support you
Involve your key leadership, subject matter experts and legal team to come up with proper if-then-else scenarios.
Work on developing mitigation strategies which could include steps such as: arranging alternative suppliers (at least for short term), minimizing demand for specific products/services (work with your customer), change in order quantities, acceptance of product with acceptable lower specifications, etc
- Inform your customers about the impact of COVID-19 to your organization
Treat your customers as important stakeholders and have a transparent communication on the effects of Covid-19 on your organization. As you have done with your suppliers, similarly they would also need complete information on your ability to support them.
- Identify risk in key contracts and develop mitigation measures
Your team by now should have established contracts critical to your organization, based on how problematic they could be. These should be identified and marked as risky even if they have not yet become a problem, but have the potential to become one based on your assessment.
Other parameters you would need to look at could be: key clauses missing in the contracts, financial hit to your organization caused by the contract, limitations in contract in dealing with extraordinary circumstances, potential clauses that other party can exercise as “rights” and increase pressure on your organization, etc
Develop mitigation plans for each such problematic contract such as renegotiation of clauses, Termination of troublesome contracts, changing orders/volumes/prices, extension of deliverable timelines, etc.
- Discuss each critical contract with respective other party
Once you have your mitigation plans in place, it is time to take the next steps and actively engage the other party to achieve your organization objectives. Keep in mind that the Covid-19 situation has created a problem for most companies, so it is important to approach each of these conversations with a proper sense of empathy for the other party’s position as well.
Be prepared, however, that some discussions may not go well despite your best efforts. Your legal team would need to be fully involved so as to also prepare for any potential legal disputes. These disputes may not be immediately raised while the COVID situation is still raging, but may come up at a future time as well.
- Review your organization contract approach
This pandemic situation has brought with it tremendous opportunities for learning and improvements. Especially when it comes to your organization’s approach to contracts, it is quite possible this is an invaluable learning for your leadership and legal teams. Ensure going forward that your contracts have proper BCP related clauses, more robust with respect to completion and interpretation of all key clauses, appropriate clauses for de-risking and protecting your organization’s interested in uncertainty, etc.
All in all, from a contract management perspective – treat this pandemic situation from a positive frame of mind in the sense that it may have exposed certain vulnerabilities of your organization – which is also a valuable opportunity to ensure that you become cognizant of the same, and take measures to improve your contract management approach in the future.