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Covid-19 – 5 top tips for managing your commercial contracts24th March 2020 Corporate
As the effects of coronavirus (Covid-19) have become more widespread, the need for businesses to review their commercial contracts and understand the effect the pandemic may have on their business and contractual relationships has increased.
At present, businesses globally are considering how best they can protect themselves and mitigate against the resulting economic effects of the pandemic. To date, countries are increasingly implementing lockdowns, with the UK following suit yesterday. The resulting impact on the economy has created uncertainty and instability for businesses across all sectors and supply chains and many businesses will be concerned about the possibility of their own business (or their suppliers, clients or other business partners) finding it difficult or even impossible to perform their contractual obligations.
We have outlined below 5 tips for businesses to consider when reviewing and managing their commercial contracts. This follows our recent blog, discussing coronavirus and force majeure (which may provide one remedy for businesses in difficulty) and our blog on the signing of documents when working remotely.
1. Early and frequent communication with business partners
Due to the increasing uncertainty, open and clear communications with business partners to understand how they have been affected is more important than ever. As UK businesses have seen first-hand, the government guidance is ever-changing to reflect the knowledge we are gaining about coronavirus and in turn, this could affect businesses in different ways. As the majority of businesses will be affected at some point, businesses may be more understanding of difficulties faced and may be willing to cooperate and reach compromises if they are informed early of any difficulties providing them with an opportunity to resolve any problems faced. It may also allow the parties to source alternative suppliers early on.
In such circumstances, it is imperative that communications take place frequently allowing the parties to prepare or enact any business contingency plans if any disruption is anticipated following communications. Even in cases where your business dealings have not materially changed to date, early communication will help you act quicker should the need arise.
2. Review commercial contracts early and in detail
Understanding the contractual obligations in commercial contracts at an early stage is essential so that your business can plan the best course of action or commence contingency planning in light of any anticipated difficulties. Key clauses to focus your review on will include force majeure, cancellation and termination clauses. Whilst it is important to be aware that each individual contract will need reviewing as part of this process it may be that businesses will want to focus their review in the first instance on business critical contracts and create a list of priority for its internal contract review process. It is also worth considering how any delays or closures may affect the contract, for example, if a delay allows the other party to terminate or suspend the contract then this could be significant for your business. Importantly, where the contract includes clauses that set out contractual procedures or notice requirements, you will need to ensure that you comply with these (for example, force majeure clauses often set out conditions that must be adhered to).
It is also important to review defined terms that ordinarily would be unproblematic such as “Business Days”. This will be particularly key if the time to carry out your obligations is set out in business days and you should consider whether these time limits can be met.
If you are concerned about any provisions in your current contracts you could seek to amend the terms of the contract (see below). However, your ability to do so may be restricted due to existing contractual provisions that may determine whether provisions can only be amended by mutual agreement or in some circumstances in writing.
Your review may also act as a prompt to update your template contracts to be used in the future if you identify provisions that have created risk for the business that could be avoided in the future.
3. Record variations in writing
As considered above, in these difficult times it would not be unusual for parties to come to a commercial arrangement which varies the terms of an existing contract. In some circumstances, this could benefit both parties and achieve more certainty moving forward.
If you do reach an agreement that changes the contract you should ensure that any agreement is properly documented. Failure to do so could lead to the amendments being void or unenforceable. Again, it is important to review the contract as in some cases the contracts may stipulate that oral variations will be excluded and/or that a formal process needs to be followed for the changes to be enforceable (such as the contract being signed by or on behalf of the parties). Clearly documenting the changes will also help establish or defend any claim in the future if there is a disagreement between the parties as to the precise nature of the change. Keeping copies of key correspondence with other parties in addition to the contractual changes will also be helpful should there be dispute relating to interpretation of the clauses.
4. Mitigate losses
Unfortunately, many businesses will find themselves in a situation where a contractual obligation has been breached in the upcoming months. If this does occur, the party that has been subject to the breach will often have a duty to mitigate its losses. If, for example, your supplier breaches the agreement this could also affect your ability to comply with contracts with other parties. Whilst, it is unlikely that any businesses would avoid making contingency plans in light of the current economic climate, businesses, need to take steps to ensure that despite the breach they are taking reasonable steps to limit losses otherwise, such losses may not be recoverable. This may include negotiating terms in contracts with other parties or trying to find alternative suppliers.
5. Manage ongoing commercial relationships and contractual agreements
Continual management of commercial relationships and the contractual terms in light of anticipated disruption will be essential for the survival of most businesses. We have identified below some further general tips businesses on contractual management:
- Take preventative measures. This could include early delivery of goods in anticipation of future delivery difficulties if there is a lockdown or changes to the price or quantity of the goods;
- Monitoring the performance against the contractual terms to identify any potential issues at the earliest opportunity; and
- Understanding the process that needs to be followed if a dispute does arise (for example, there may be a dispute resolution clause). Where a dispute does arise, we would recommend early involvement of solicitors to help you manage the dispute effectively.
Our commercial team has also provided commentary which is featured on the Future of Sourcing’s website, which discusses the signing of contracts remotely and managing contracts and the supply chain which can be found here.
If you want to discuss your business plans, please contact your usual JMW contact on 0345 872 6666 or complete the contact form found on this page.
This article is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.