• 4 min read

How are Contracts impacted in the COVID-19 era?

Contracts In 2300 BC

Around this time, a written contract came first into existence as per records in the Sumerian period. With the passing of each period from Greek to Roman to Crusades, contracts became ubiquitous in multiple cultures and were signed and approved in many forms. During some periods, French and English warranted a contract with a handshake. Well now, strange times have indeed arrived for us. Handshakes are a burden in the current COVID-19 contract management era and so is running a business in an uncertain environment requires a strong Force Majeure for vendor contracts.

Contracts in AD 2020 : Era of COVID-19

For such uncertainties, most organizations have prepared a business continuity plan and have dedicated disaster recovery teams to keep the businesses running. Organizations have started to review and comb through each clause within contracts and weigh the impact on the value chain. To counter COVID19 risks, governments (E.g. UK) and major organizations have started laying out newer procurement policies to lower COVID-19 disruptions. Even commercial banks had not considered such severe business discontinuity in terms of clauses and are easing financial reliefs to businesses to stay afloat. This economic story of COVID-19 is still in progress.

Despite the uncertainties, businesses have importantly started to look inwards. As a procurement professional, let’s talk about how you can begin to minimize the liability of non-performance in contracts.

1. Force Majeure

Force Majeure is a legal doctrine under which a party may be relieved from liability from non-performance. This is an exception that can save the performing party from liabilities and breach of contracts in unforeseen circumstances. The legal definition and interpretations can be found across the internet and can help you understand how businesses can use this clause.

The Force Majeure clause started coming into the picture in February. During that period, China’s supply chain was severely disrupted and many organizations were staring at delayed delivery timelines. Now, almost every major corporation in diverse industries such as Oil, Construction, Manufacturing, etc has started to invoke Force Majeure from contracts and suppliers are using the clauses to protect themselves from liabilities. As a procurement professional, you might have to start understanding and tracking the performance with liabilities. Moreover, you can consider if your business qualifies to get ‘Force Majeure certificates’.

2. Supplier Risks Management

In theory, Supplier Risk Management should be able to cover every major risk in supply chains(including COVID19). As a procurement professional, you know that Supplier risk management is a difficult balancing act of understanding suppliers and minimum impact on your business.

If a contract does not have the specific Force Majeure clauses, then suppliers might become liable for non-performance or can invoke Acceptance of Renunciation. Currently, as most Chinese suppliers are getting sued for millions of dollars, the Chinese Government has stepped in to protect suppliers. For your procurement division, you can focus on identifying new suppliers to get your essential supplies. During this lockdown period, with less consumer demand you can now start identifying stocks spread across different storage locations and warehouses. In this way, you can be prepared for a looming recession and balance your production with consumer demand.

As a procurement professional, you might be aware that those do not encompass the supply chain risk. But Force Majeure and Supplier Risk Management are two of the multiple deciding factors in your contracts. For most organizations, setting up and accessing the clause library is critical to search for such clauses and apply to the same across all contracts. Advanced CLM solutions like Aavenir Contractflow can help extract Force Majeure clauses and allows updates to all vendor contracts. The solution also auto-extracts all post-contract obligations and defines actions for fulfillment and compliances. COVID19 is acting like a bitter tutor to repeal mistakes while preparing contracts.

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