This article is a step-by-step guide to managing contracts during the COVID-19 pandemic. It contains five free Excel templates to help with the various steps described.
COVID-19 is exerting acute economic pressure across all geographies, industries and sectors at the same time. This combined with the obvious human and health concerns, is creating an extremely volatile situation for businesses to navigate.
Central to navigating the next 3-6 months successfully will be accurate assessment of contract obligations and risks, as well as sensitive relationship management and tight control over cashflow.
In this article we focus on the actionable steps to be taken by those responsible for contract management in your business.
Every organisation needs to respond in its own fashion to the issues presented by, and government responses to, COVID-19. Such a response will necessarily require much effort from many parts of the organisation, so the sum of individual function-level issues, both external and internal, can be rolled up to reveal a generalised, organisation-wide picture.
This response effort will need to be ongoing for the foreseeable future, with regular updates containing analysis of how the situation is unfolding, and recommendations for actions to ameliorate the situation if at all possible.
All information collected, analyses prepared and recommendations made by the review process during and after the pandemic should be formally documented and stored.
To help get you started with this, we’ve developed a simple Pandemic Issues Log template which you can use to record all the requisite information.
While in no way diminishing the tragic and devastating human toll from COVID-19, its main effect on commerce can be boiled down to the potential for workforce shortages and business shutdowns to limit the ability of organisations to:
- Obtain goods and services from their suppliers
- Provide goods and services to their customers
- Comply with any other arrangements they have in place with third parties
- Execute new contracts with third parties
In a nutshell, the commercial issue is that organisations may not be able to meet their contractual, financial and regulatory commitments.
Many organisations can expect a reckoning, contract-wise, even during these early stages of COVID-19.
“Both the genuinely affected and the opportunists might be pulling out their contracts right now, looking for their entitlements with regard to non-performance by their third parties, and any limits to their obligations with regard to their organisation’s own non-performance."
The Contract Management team will be heavily involved in your organisation’s response to COVID-19, given that contracts form the foundations of commerce.
Here, we’ll take you through 11 key activities relating to your business’s contracts and vendors that will need to be carried out:
- Identify your key contracts and their key terms
- Understand how COVID-19 is affecting your key suppliers
- Determine the knock-on effects of supplier issues on your organisation
- Develop approaches for mitigating supplier issues
- Advise all customers about the effects of COVID-19 on your organisation
- Assess risk in your key contracts
- Propose measures for dealing with problematic contracts
- Discuss each problematic contract with the relevant party(s)
- Formulate the course of action to be taken for each problematic contract
- Enhance your contracting approach
- Log every action taken
A Contract Management Response to COVID-19
1. Identify your key contracts and their key terms
Key contracts are those critical for keeping your organisation operating. They can cover the acquisition of vital products and services from suppliers or the provision of valuable products and services to customers. Contracts that cover the conduct of other types of business with third parties might also be considered key.
A key contract might have been provided by the organisation itself or the third party it is dealing with.
The criticality criteria for contracts need to be established from the organisational perspective, not the individual business function level.
Once a key contract has been identified, the relevant contract documents should be scanned to check for the presence or absence of key terms.
“This step is necessary because the advent of the pandemic might reveal a number of contract terms, rights and obligations that ought to be included in every contract, that should have some certain minimum setting, that should be excluded to the extent possible, and so on."
To be able to make judgements about such terms, the organisation needs to have established benchmarks describing all its preferred, acceptable and unacceptable positions on those terms.
These positions can vary based on any number of aspects about the contracts they are used in, such as contract type, governing law, contract purpose and so on. For certain, current legal advice will be required for these judgements.
Some of the contract terms that could be of interest include:
- Force Majeure Scope. This clause can provide a party to a contract with a temporary or permanent release from its obligations and liabilities when prevented from, hindered in or delayed in complying with those obligations due to circumstances beyond its control.
The presence of this clause should be mandatory, given the high levels of uncertainty in today’s environment. The clause needs to be drafted very carefully, to ensure that all possible circumstances are covered, no matter how remote their likelihood, and all reasonable rights of and obligations on all parties, plus pertinent timelines, are specified.
- Termination Options for Cause and Convenience. These clauses give contracted parties the right to end a contract under certain circumstances. The specific circumstances often determine how termination can be achieved, such as immediately, only after notice of default is provided and the default remains uncured after a set time, only on the anniversary of the contract commencement date, and so on.
The supplier may allow early termination for convenience, sometimes with some type of penalty, such as a charge equivalent to the fees that would have been incurred from the termination date up to the end of the term or the next anniversary of the contract’s commencement date.
If the organisation terminates for cause, it should also require the supplier to refund the unused portion of any pre-paid fees. Often, suppliers give themselves more termination rights than their customers. This should be resisted to the extent possible. What’s good for the goose…
- Supplier Exclusivity. This clause limits the organisation to obtaining whatever products and services are specified in the contract from only the third party named in the contract. Often this clause is used to obtain keener pricing from the third party than otherwise, at the expense of the organisation not being able to take advantage of better pricing for similar products and services from other suppliers for the duration of the contract.
The presence of this clause can be a major concern especially if the contracted supplier cannot deliver to time, cost, quality or any other agreed standard. This is particularly the case if the organisation has limited or no contract termination rights, or lacks a release from the exclusivity obligation based on the supplier’s delay or non-performance.
- Supplier Performance Requirements and Non-Performance protections. The service delivery performance of every supplier under contract ought to be measured against some standard that is agreed initially but may change over time.
The details of what is to be measured, how, when and by whom, plus what is to be reported, when and by whom, needs to be clearly specified in the contract in the form of Key Performance Indicators (KPIs) or a Service Level Agreement (SLA). Any self-reporting of performance statistics by the supplier should be periodically validated.
Some form of redress for self-inflicted supplier under-performance should be specified to encourage the desired behaviour.
The ongoing relevance of all performance measures and targets should be regularly reviewed.
- Minimum Order Quantities or Spend Thresholds. Minimum commitment clauses, in terms of time-bound spend amount, product quantity, resources used and other measures, are often specified in contracts to enable a supplier to recoup upfront costs, conduct resource levelling or achieve other contract-term benefits, often with the enticement of lower ongoing unit charges to the organisation.
These obligations can severely limit an organisation’s flexibility in times of business downturn or other uncertainty, and can be hard to get out of, even when suppliers don’t perform to expectations. To add insult to injury, there are usually consequences specified for the organisation’s failure to meet any minimum quantities.
There are other less limiting ways to satisfy a supplier’s ROI, so whenever encountered, minimum commitment clauses should be challenged using good legal advice.
- Price changes. This clause specifies the circumstances where and when a price change might be required by the supplier, most often upwards but occasionally downwards. These circumstances might include inflation exceeding an agreed rate, exchange rate rises or falls, failure to meet any minimum commitments, exceeding or dropping below any volume tiers. Often, prices might be annually adjusted upwards as a matter of course, either by a fixed amount or a variable amount to account for inflation.
- Payment terms. This clause can specify various elements of the payment terms, such as how often billing takes place, how bills will be presented, the period during which payment must be remitted, the consequences of late payment, the right for the payer to dispute the invoice contents or amount, the right for the payee to charge a particular interest rate on any undisputed overdue amount or to suspend services until all outstanding mounts have been received, the currency of payment, the acceptable payment methods, any discounts available for early payment.
This clause should always be present in a contract.
- Notice requirements. This clause specifies how formal communications between a contract’s parties are to be conducted, why and by when, especially if providing valid notice is a prerequisite for exercising certain contractual rights.
When receipt of a notice is deemed to have occurred might also be specified in the clause, as well as any consequences for non-compliance with notice requirements.
This clause should always be present in a contract.
- Limitations or Exclusions. These clauses provide a method for a party to exclude or limit liability in certain circumstances, like potential breach of contract, the amount that be claimed for such a breach, or time limits for commencing action for a claim. Many jurisdictions have enacted statutory controls to limit the effect of limitation and exclusion clauses, so use them with care.
- Change in Law. Changes to an existing law, introduction of a new law, or an action like the declaration of a state of emergency may introduce a new element of risk to a contract. This clause allows review of the contract if such a change occurs, but many limits and exclusions may apply to its activation. The presence of this clause can be handy but is not guaranteed to deliver any relief from pertinent government actions.
To help you manage this part of the process, we’ve created a Key Contracts Template.
Capturing this information in one place provides a sense of the size and value of the critical contract inventory and the scale of each party’s obligations, and is useful for planning the risk assessment of these contracts.
2. Understand how COVID-19 is affecting your key suppliers
It may be quite a job to fully understand how COVID-19 is affecting your key suppliers, those involved with your key contracts. Not only could they be directly affected but their own supply chains, wherever they are located, might also have been disrupted to varying extents.
Of course, your organisation may have already received some advice from some suppliers or registered some unannounced supply issues. This might just be the thin end of the wedge, so prudence dictates that you take positive action to obtain a more complete picture from all your key suppliers as quickly as possible.
Expectations need to be reasonable about obtaining a supplier’s response to your request that they complete this statement. Just about all their customers may be asking them for something similar, at a time when they’re desperately trying to deal with COVID-19’s effects themselves.
"Before just firing off the template out of the blue, it would be worth a quick chat with them first, to find out informally what their situation is, what other customers have been asking them, how they’ve been officially replying."
They may be already preparing a formal statement for issue to all customers, or have done so and published it on their web site and kept it updated, which can save you having to send them your own template.
One way or another though, you do need to obtain direct advice from your key suppliers about their current and developing COVID-19 situation.
3. Determine the knock-on effects of supplier issues on your organisation
As each piece of supplier impact information becomes available, you can begin to consider in detail just how each one’s situation is going to affect your organisation over time, but probably sooner than later.
The potential outcomes for your organisation will depend on, at a minimum:
- What it does and how
- How much it can get of the supplies it needs
- How little of its workforce it needs to operate, whether working onsite or remotely
- How well it can support a remote workforce
- How much income it needs to survive
- The nature of government actions in respect of COVID-19.
These factors, combined with the key supplier information and other relevant facts, should be used to model various "if-this-then-that" scenarios that have a reasonable chance of occurring.
Quite a number of internal stakeholders, and possibly some external assistance, are likely to be necessary to provide subject matter knowledge about the different operational aspects of the organisation that could be impacted by supplier difficulties.
Surprises should be expected, in both the effects on the supplier and the consequences for your organisation. This is because desperate times require desperate measures, sometimes requiring imposition of the lesser of two evils.
Mistakes will be made, unintended consequences can lead to the classic two steps forward, one step back situation, and there are few, if any, roadmaps to help guide the way.
4. Develop approaches for mitigating supplier issues
Armed with a list of potential organisational effects of COVID-19, you can brainstorm and prepare approaches for dealing with each effect. The assumptions and pre-conditions that apply need to be clearly specified, as do any success criteria to be met to allow continuation of each mitigating action.
As an example, some options that could mitigate a shortage of product from a specific supplier might include:
- Use of alternative suppliers, not or only minimally affected by COVID-19, with inventory on hand
- Use of product with an acceptable lower level of specification
- Minimising demand for the product concerned
- Eliminating any need for the product in question
While the intent of the mitigating approaches is to provide a way around supplier issues, care is needed to ensure that these actions themselves don’t introduce further issues that might in turn need mitigating.
A regular reporting regime should be established to show the changing severity of supplier issues and the success or otherwise of your mitigating actions.
The Organisational Effects of COVID-19 Template mentioned in element 3 above is available to assist with this activity.
5. Advise all customers about the effects of COVID-19 on your organisation
If your organisation is part of a supply chain with its own set of customers, then those customers need to be advised about how COVID-19 is affecting you. Some of those customers may have already asked for this information, perhaps in the form of a Business Continuity Plan (BCP).
The COVID-19 Supplier Impact Statement Template mentioned in element 2 above should be completed for your organisation as a supplier and issued to your customers as soon as possible, or made available on your website.
6. Assess risk in your key contracts
Based on the results of the initial and ongoing reviews of the organisation’s issues during the pandemic, Contract Managers should be able to identify their most problematic key contracts.
‘Problematic’ will need to be defined in terms meaningful to the organisation. For instance, it could mean:
- All key contracts regardless of whether or not they caused problems for the organisation
- All key contracts which caused a financial hit to the organisation beyond a certain value
- Any key contract with an inadequately specified or missing key clause
- Any key contract where the other party is making noises about exercising certain rights that may increase the organisation’s pain
- Any key contract with limited suitability for dealing with exceptional or even ordinary circumstances.
A thorough understanding of the key terms in the key contracts is important for dealing with the major issues and risks that can be expected over the duration of the pandemic and its cleanup.
An assessment of each contract’s key terms is needed to highlight any deficiencies and allow remedies to be proposed.
Consideration of each party’s obligations is needed to allow determination of the criticality of each obligation and understanding of the impact and implications of any non-compliance.
Examination is also required of each party’s rights to allow determination of the likelihood of each right being exercised and understanding of the impact and implications of that exercising.
A Key Contract Issues Template is available to assist with this activity.
7. Propose measures for dealing with problematic contracts
Analysis of the key contract issues detected is needed to discover the nature of any options that could be suggested to deal with those issues. Those options might include:
- Renegotiating clauses that circumstances have shown are necessary but missing, not desirable in their current form, or just not acceptable, for immediate or later implementation
- Terminating the contract, immediately or shortly, permanently or with the intention of replacing it with a more suitable version and/or supplier
- Changing the current volume or nature of products and services acquired or sold, pricing, service levels or other operational parameters
- Extending milestone dates and other delivery schedules to recognise that everything is far from business as usual these days.
With the assistance of the Legal team and the relevant operational stakeholders, the Contract Management team should consider all the identified issues in each problematic contract, with the aim of formulating responses preferred by the organisation, as well as fallback and unacceptable positions.
The aim of this work is to set the parameters for negotiations with the suppliers in question.
The Key Contract Issues Template mentioned in element 6 above is available to assist with this activity.
8. Discuss each problematic contract with the relevant party(s)
Whether your organisation buys from suppliers, services customers, does both or has some sort of other business arrangements with third parties, every key contract that is problematic in some fashion needs to be discussed with the relevant third party(s).
The problematic contract areas need to be revealed and the effects on the organisation explained.
The proposed mitigation measures and their implications for each party must be presented.
Depending on the volume of issues found and their debatability, rapid agreement on the mitigation measures and the course of action to be taken could be reached during this discussion session. In this event, the Key Contract Issues Template mentioned in element 6 above is available to assist with this activity.
However, the likelihood is that the other parties will need some time to consider their position on the effects and their proposed mitigations.
9. Formulate the course of action to be taken for each problematic contract
This element is Negotiation 101, pure and simple. Agreement is needed on the problem boundaries and the proposed mitigation measures. Alternatives may be offered then accepted, rejected or agreeably modified.
However the negotiations pan out, there needs to be an outcome of some sort. This could mean an agreement to leave the contract unchanged, modify it in some fashion or terminate it.
“If the contract is to be modified or terminated, an action plan must be formulated and agreed for the achievement of the desired outcome, then implemented and managed to completion.”
The Key Contract Issues Template mentioned in element 6 above is available to assist with this activity.
Whatever the contract outcome, any party or all parties might initiate legal action to obtain some kind of relief or damages for failure of the contract. Such action might not necessarily be revealed at this time.
10. Enhance your contracting approach
The nature of each key contract’s upgrades is likely to be different, depending on the circumstances applying in each case. The original clause wording and the flexibility of each party in reaching consensus on how that wording should be changed will play a big part in this.
The general lessons learned from upgrading your key contracts need to be applied to your organisation’s preferred and fallback positions on the key clauses involved. These lessons should be applied over time to any important though not key contracts, and to all new contracts regardless of importance.
These lessons might cover:
- Ensuring the completeness of a clause
- Dealing better with uncertainty
- Making the whole contract generally more robust and complete
- Countering the ways that a contract might be inadvertently susceptible to exploitation or advantage by considering it from the other party’s perspective.
11. Log every action taken
Special attention must be paid to recording details of all actions taken in response to COVID-19. This information may be critical for assessment of the applicability of various contract clauses that might be invoked as a result of a party’s non-compliance with contractual obligations.
For instance, when relying on a Force Majeure clause to provide relief from compliance with obligations, proof is likely to be needed from the applicant for relief that the applicant actually took action to mitigate the causes of the Force Majeure event in an attempt to achieve compliance with the affected obligations. Merely claiming relief only because of the occurrence of the event is unlikely to be successful.
Valuable insights, lessons learned and knowledge about the organisation’s operations and agility could be gleaned from such material. Awareness of possible government actions to deal with a pandemic, and the implications of those actions, will certainly be raised.
Pre-emptive actions could be taken to bolster the organisation’s resilience against a second wave of COVID-19, a different pandemic or serious disruption to business, whatever the scale.
Approaches for reacting to potential new situations might be developed and road-tested to further enhance that resilience.
The suitability of the organisation’s general business continuity plans in light of the pandemic issues being faced and potentially looming will certainly be exposed.
With so much disruption to daily life, both private and organisational, the pressure to deal with the issues and the sometimes sheer impossibility of doing so, will inevitably mean that actions taken will be forgotten or misremembered.
The consequences of the fallout from COVID-19 could be more severe than otherwise if all the details aren’t available to facilitate understanding, reflection and planning.
The outstanding feature of COVID-19 to date, apart from the appalling human toll, has been the absolutely necessary severity of government actions to try to limit the infection rate of the virus. Just about everything is unprecedented in this regard, beyond the scale of anything seen or experienced before.
This aspect also applies to the way organisations are trying to respond to the level of business disruption resulting from those government actions.
For Contract Managers, there is so much work to do that has likely never been contemplated before.
The silver lining to this is that a very focussed light has been shone on a general lack of readiness for dealing with events that are unexpected but not improbable.
This article describes one approach for dealing with this Contract Management work, highlighting some important processes that need to be set up and followed, both to get on top of current circumstances and to lay the groundwork for a more complete, robust and resilient approach to uncertainty in the future.
It probably won’t be easy, trouble-free or without some false starts, but we should have confidence in getting there.
As Shakespeare once wrote: “adversity brings out the best in man."
As Nietzsche once wrote: “what doesn’t kill you makes you stronger.”
Let’s hope that these sentiments are as true today as when they were first written.
We have also created a FREE ebook, inclusive of the 11 business activities you should completed and the Excel templates you should use. You can download it below.
This article does not purport to be, and it should not be construed as, legal advice. Always consult a qualified lawyer for legal advice.