How to future-proof your contract management process for crises
As we continue navigating the uncharted waters of the coronavirus (COVID-19) pandemic, organizations around the world are experiencing issues that affect almost every aspect of business. Almost all facilities have been shut down in an attempt to flatten the curve of the virus’ spread, creating problems that transcend industries and organization size.
Accordingly, many businesses need to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure and other clauses to excuse performance temporarily — or even permanently.
In many cases, organizations are finding little refuge in existing contractual terms. But if we’ve learned anything from this situation, it’s this: preparation is key, and with a sound strategy and strong technology, contracts can be better future-proofed (or at least prepared) for various business environments, including a pandemic.
Sounds intense? We’re in this together, and we’re here to offer some guidance.
Keep reading to learn more about:
- Key clauses to consider
- Challenges (and options) to future-proof your contracts
- Additional clauses
- Technology to help
Key clauses to consider
When analyzing contracts to determine the availability of a temporary or permanent remedy, legal scholars have suggested a wide range of clauses to consider. Top of mind when contemplating the impact that pandemics and specifically the infectious disease, COVID-19, can have on contracts is the force majeure clause.
It excuses a party’s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations. Here’s a sample force majeure clause:
In the event either party is unable to perform its obligations under the terms of this Agreement because of an Act of God, unrest, strikes, equipment or transmission failure or damage beyond its control after appropriate action, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
Contract language is the predominant factor in interpreting force majeure clauses, and contracting parties should carefully consider how they draft such provisions to allocate risk appropriately.
Force majeure challenge 1: Clarity is key.
Recent events, including the declaration of COVID-19 as a pandemic, along with subsequent bans on gatherings and restrictions on movement have altered the force majeure landscape in a manner that may impact the availability of such provisions to non-performing parties. The most clear-cut situations would be those where the force majeure clause specifically references “infectious disease” (which the example above does not) and eliminates any requirement that the event be wholly natural, as opposed to political (eg, including “acts of government” along with “acts of God”).
Force majeure challenge 2: Then what?
Another major consideration when drafting such clauses is the appropriate remedy. Will the force majeure event render the contract:
- null and void? or
- temporarily suspend performance?
Again, since contract language is paramount in these instances, the contract drafter must be abundantly clear. For example, if your business desires the flexibility to terminate the contract completely during a hypothetical second wave of the virus, or a similar pandemic, the document should specify something to the effect of:
“Upon the occurrence of any such force majeure event enumerated [in reference paragraph] then [both parties | only one party] may immediately terminate this Agreement and shall have no further rights, obligations or entitlements under this Agreement.”
Though force majeure will likely be the most discussed clause in this context, there are other clauses that could potentially be connected.
Doctrine of impracticability
The doctrine of impracticability excuses nonperformance or delays in performance of a contract if an unforeseeable event materially changes the nature of a party’s obligations under the contract. Whether this doctrine can be invoked is heavily dependent on the facts and circumstances of a given situation.
It’s vital that the contract drafter is explicit with language to effectively apply this doctrine in future business environments, and should a second wave of COVID-19 occur.
Frustration of purpose
Similarly, the doctrine of frustration of purpose may apply when the primary reason for entering into a contract becomes impossible due to some event. In the case of COVID-19, one could imagine this doctrine being invoked, in this example:
Someone rents space to watch a July 4th parade and fireworks show. Due to event cancellations and bans, they can no longer use the rented space. Thus, the original purpose of the contract has been completely frustrated.
Future-proofing for such a situation and use of this contract doctrine means the contract authors should carefully detail such intent in the document.
Delivery of notices
Contracts will often provide that notice of a termination event must be delivered to a party by hand, and some even require that notice be personally delivered with a return receipt in order to be effective. In a changing world, and with COVID-19 persisting, such hand delivery may no longer be possible. Most contracts will specify an office address for the delivery of such notices, and many offices are now closed. Moving forward, contract authors should, at minimum, consider using email addresses for alternate delivery of notices.
Business interruption insurance
Moving outside of the four corners of the contracts, companies should consider whether insurance protection might be available to address certain losses and interruptions resulting from the pandemic. Companies anticipating potential business interruption should review applicable insurance policies and provisions, including business interruption and contingent business interruption insurance.
Based on the impact of COVID-19, companies should proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from COVID-19 would be covered. A review of their policies’ insurer notice requirements should be conducted to ensure their scrupulous compliance with those provisions in the event coverage is needed.
Also, legal commentators recommend that insurers take proactive measures by reviewing their standard policy language in anticipation of such claims, and preparing themselves for the near-certainty that insurance coverage lawsuits will be filed in connection with uncovered losses.
Technology to help you along the way
At Conga, we’re committed to helping you before, during, and after the proverbial storm. A few ways we can help contract future-proofing by way of technology include:
- A central repository with powerful search capabilities
- This gives you an easier way to quickly assess which contracts may be affected by COVID-19
- Our AI tool, Conga AI Analyze: to stress test the repository
- Use AI to train multiple clause types, like force majeure and frustration of purpose, in order to stress test the repository for relief
Additionally, a robust CLM system, like Conga CLM, allows you to search for affected contracts by clauses and terms, to streamline mass amendment, and to handle changes using Microsoft Word while seamlessly connected to the CLM application.
Finally, using our powerful form generators, clause libraries, and workflow management capabilities will permit lead contract drafters to design and implement gold standards across the organization, along with rules and workflows to ensure their consistent utilization.
COVID-19 is having a significant and harmful impact on businesses and their ability to perform under their contracts. Many epidemiologists have theorized that a second wave of infections may occur later this year. If that happens, your organization needs to be prepared. We’re here to partner with you as you make the necessary transformations to not only keep business moving, but to protect your company for future interruptions that could affect your contractual obligations.
Get started today by updating your clause language, reviewing contract practices (e.g. delivery and insurance), and using digital transformation technology to increase your likelihood for success.