COVID-19: The importance of contract flexibility
Talk to your suppliers and customers about the contracts you have in place
Both suppliers and customers are often reluctant to discuss money with their contractual partners, perhaps due to concerns about how it will impact their relationship. However, these conversations are vital.
First, businesses should assess the contract document as a whole. If the arrangement is due to end soon, then it offers a talking point regarding the future of the contract. If not, the following clauses and agreements should be considered:
- Framework agreements – These may have flexibility built into them, allowing one or both parties to refuse orders should they be unable to afford them. However, this is not always the case, so it may be wise to discuss how the agreements can be made more effective in the UK’s current climate.
- Force majeure – Probably the most relevant clause for COVID-19, invoking this excuses one or both parties from temporarily performing their obligations, due to a disrupting event. Valid events can be listed in a contract, but this can cause issues should the event not be included. Either way, force majeure clauses should be discussed.
- Frustration – Similar to force majeure, but without the need for an express clause, frustration can lead to a contract being ended. Effectively you have to show that the whole purpose of the contract has been undermined by the disrupting event, making it a challenge to apply it where such events are seen as being “temporary”.
- Outstanding payments – Whether an express clause or not, payment is a fundamental part of any agreement, so the failure to pay can sometimes be used as a reason to suspend a contract.
How can I negotiate my contractual obligations during the COVID-19 pandemic?
As an alternative to invoking legal principles or clauses straight away, businesses can take a good faith approach and negotiate a way forward.
Everyone is feeling the same strain at the moment, so communicating this to contractual partners can help companies to find a mutual understanding. Doing this can allow for a practical solution to be created that works for both parties, without having to get the courts involved.
Organisations that do choose the negotiation route can agree anything that works for them, but they must document it in writing.
Recognising that now is not the time for harsh decisions will be key to businesses riding out the COVID-19 wave with relationships still intact. By being flexible and open to negotiation, organisations can find solutions that benefit everyone.
For businesses seeking further guidance, contact a member of your local commercial team.
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General advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.
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