2020-05-07
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What will the “new normal” look like for commercial contracts?

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Posted by Patrick McCallum on 07 May 2020

Governments across the world are facing mounting pressure to outline their plans to get us to a post-coronavirus world, aka the “new normal”.

From a business perspective, whilst a lot of the focus has been on when lockdown measures can be loosened, in order for businesses to operate more freely, the other side of the same coin is instilling confidence in those businesses that they are able to do deals, in order to kickstart the economy.

Market confidence is a fragile and intangible thing. Assuming, of course, that the country’s health is not at risk from COVID-19, it is relatively easy to remove lockdown measures. It is not so easy to convince businesses to go back to operating as normal. A lot of this is down to uncertainty as to what their “new normal” will look like.

With this in mind, we have set out a few thoughts on what issues we consider will be of particular concern to businesses when negotiating new contracts in the months ahead.

  • Flexibility: there is no doubt that the road to recovery will be a marathon, not a sprint. We cannot ignore the fact that we will be living in an uncertain period for some time to come. As such, businesses will want to be able to remain flexible to respond to events as they unfold. From a contractual perspective, this will likely mean:
    • A reduction in the number of long-term contracts. It is likely that contracts will be entered into for short initial terms, perhaps six months or a year at best, with renewals beyond such initial period likely to be subject to agreement rather than automatic.
    • Increased termination rights. It is likely that both parties will want to have the right to terminate for convenience (on relatively short notice) in order to be able to quickly exit from a contract and respond to any change in market circumstances or government policy. Whether a termination fee would be payable in such circumstances would be a point of negotiation for the parties.
  • Service Levels: suppliers are likely to scrutinise any service levels which a customer seeks to impose in much greater detail, particularly in relation to volumetrics and minimum sales targets. For example, demand for goods and services could fluctuate significantly over the coming months, depending on a variety of factors, so distributors will be very wary of making any commitments to manufacturers as to their ability to distribute a minimum amount of goods over any specified period of time.
  • Delays: the current restrictions on travel and the movement of goods has led to delays to the provision of goods and services in a number of industries. It is likely that customers will find it even harder than before to get suppliers to agree to time being of the essence in respect of delivery. Suppliers will likely be offering less ambitious delivery times and will want to insert additional qualifications to their ability to deliver on time.
  • Payment: to counter the increased risks in delays, customers are likely to insist on only paying for goods or services upon delivery/completion or increasing the percentage of the price which is payable upon delivery/completion. This may incentivise suppliers to come up with innovative ways to better ensure quick delivery times but also pose a risk to their cash flow, particularly if customers enjoy favourable payment terms.  
  • Staff: most businesses have had to significantly reduce their workforce during lockdown due to furloughs and redundancies. As countries move back towards the “new normal”, it will be tough for businesses to know when to bring back furloughed staff and at what rate, in order to effectively carry out their business operations and meet customer demand. It is standard practice for contracts to contain a clause requiring suppliers to have adequately skilled staff in order to provide the relevant goods or services, but this clause could take on more importance in the future. Customers may wish to have more remedies available to them (for example, a right to terminate) if suppliers are found not to have the right personnel to perform their contractual obligations. Alternatively, suppliers may regularly be required to warrant that certain members of staff will not be furloughed for the duration of a contract if such individuals have particular expertise in the delivery of certain good and/or services.
  • Force Majeure: what constitutes a force majeure event under a contract (and therefore excuses a party from a failure or delay in performing its obligations under that contract) is likely to be the subject of intense negotiation. It goes without saying that epidemics and pandemics will be top of the list of any new definitions of “force majeure event” going forward. However, parties should also consider whether the actions of government and local authorities need to be included within such definition, where it is the response of such entities to COVID-19, rather than the virus itself, which causes them to be unable to perform their obligations. Similarly, parties will need to decide whether defaults by subcontractors or other third parties in the supply chain (whether or not due to COVID-19) will fall within the definition of a force majeure event.

Each contract is different, so every business will face its own unique challenges when it comes to entering into new contracts in the new normal. Whether it’s some or all of the above issues which pose a problem for your business, or ones that do not appear on this list, we can help you negotiate them with the other side and come up with a contract that works for all parties involved.

About the author

Patrick is a solicitor in the commercial team who helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.

Patrick McCallum

Patrick is a solicitor in the commercial team who helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.

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