06-23-2020 | Blogs, Business Transactions

Long-term Impact of COVID-19 on Contracting

By: BrownWinick


 

The coronavirus pandemic has permanently transformed the default structure of contractual relationships between business entities. In the past few months, the use of force majeure clauses and the doctrines of impracticability/impossibility and frustration of purpose have skyrocketed as businesses attempt to terminate unfavorable agreements. This recent uptick can be attributed to the unprecedented challenges facing many supply chains and the ability of businesses to maintain continuity and continue performing their contractual obligations.

COVID-19 caught many businesses unprepared to adjust their contracts to meet rapidly changing circumstances, so here are some long-term contracting trends and tips to avoid similar downfalls in the future:

1. Crafting unique force majeure clauses specific to your business’ needs and circumstances

These clauses will no longer be a mere boiler plate addition but should expressly contemplate the impact of unforeseen events such as COVID-19 on your specific industry. Careful thought should be given to the scope of events that would disrupt your business’ ability to complete contractual obligations. Also, the consequences of enacting a force majeure clause should be tailored to maximize both financial security and the health of your business relationships. That means allowing for suspension or alteration of contracts when termination is not necessary or beneficial.

2. Providing for increased flexibility and variation under certain circumstances

Many current contracts contain provisions mandating the use of specific suppliers, fixed prices or minimum volume commitments without exception. As COVID-19 has demonstrated, these requirements are not reasonable during a global crisis of such a large scale. Therefore, businesses should start individually assessing the appropriateness of these provisions and amending them or removing them when possible.

This means allowing for the use of alternative materials or ingredients when circumstances require and acknowledging the situations in which services will be restricted and certain supplies may be unnecessary. In addition, diversifying supply chains will protect your business’ productivity from other supply shortages unrelated to a global pandemic. Finally, while it may seem like an uncomfortable topic to discuss with those you are in business with, provisions outlining the allocation of risk and protocol to follow in the event of insolvency are highly recommended.

3. Considering the impact of supplier location

Many businesses need to start rethinking the value of contracting with a single supplier and shift their underlying priorities for selecting suppliers. While contracting with multiple parties for the same good may be more expensive, diversifying your supply chain in multiple parts of the world can greatly reduce risk associated with localized natural disasters. COVID-19 has also significantly altered the cost of doing business, delivery arrangements, pricing, and, ultimately, liability and termination provisions associated with international suppliers, particularly in China.

Moving forward, companies should prioritize flexibility over the cheapest option. Moreover, utilizing suppliers from the same geographic region as your business may be useful to mitigate the risk of delays or nonperformance due to future transportation complications.

4. Ability of industries to resort to online working and routes to market

More than anything, COVID-19 has accelerated the push for companies to experiment with employees working remotely. This means that companies with the ability to employ remote workers provide more contract security and therefore are much more attractive to contracting businesses. In the same vein, industries investing in smart factories and reducing the amount of close physical contact may possess the crucial element to completing their contractual obligations in the event of a second wave of the coronavirus. Now, online capabilities not only present a competitive advantage in future contract decisions, but insure the continued viability of the contractual relationship.