Supplier's Corner #3 - Contracting in the Time of Corona

The combination of Corona and oil price war is a hard-hitting cocktail. But, when going through hell, keep going. Yes, the fallout of especially Corona on existing contracts needs to be handled. But so does new business and new contracts. How should that be handled and what are the opportunities, in light of the unfolding events and the lasting uncertainty?

Consider this. Very few Contractors paid a lot of attention to effective pollution clauses prior to Macondo. They do now. Probably even fewer paid attention to the force majeure clause before Corona hit. Sure, more or less everyone made sure that force majeure was included in the contract, but few probably bothered to read it, and even fewer did a thorough analysis of its content. Wars normally don't break out in our part of the world. Typhoons don't exist and virus outbreaks are something that happens in rural parts of Africa. Until now. Until WHO declared Corona as a global pandemic, resulting in closed borders, curfews in major cities and the world economy came crashing down.

So, what do you do with your future contracts to minimize risk, ensure flexibility and secure your project margins? Here's a spoiler - an ordinary force majeure clause will most probably not do you much good. Here's a few thoughts on what will.

It's of course still important that the contract includes a force majeure clause, but it will not be sufficient in the current situation. A force majeure clause is intended to deal with unforeseen events, and although there may still be consequences of Corona that cannot be foreseen today, I would not bet my house on it. The short answer is to turn the situation around, expect the unexpected and address the insecurity. Amend your ordinary force majeure clause to specifically cover future fallout of Corona. While you are at it, you may want to consider specifying that future similar outbreaks shall constitute force majeure.

But there's more. Take a look at the Change of Law clause for instance. Remember that governmental reactions to the virus often pose more problems to your business than the actual virus. A change of law affecting delivery will normally give the Contractor the possibility to delay without liability or request a variation order. However, governmental reactions may come in different shapes and colors, and they may come from other institutions than your national government. Make sure the contract covers a sufficient range of such reactions and that they have the desired effect on your obligations and liability.

The situation should also be addressed in a number of the more ordinary contract clauses that could come into play. The key word is flexibility if the situation deteriorates further, or similar situations arise in the future. I will suggest some of those clauses here. There are others. Firstly, take a look at the delivery clause. Phrases, such as "time is of the essence" and the likes should be avoided even under normal circumstances, especially in English law contracts (a topic in itself for another time). Now, it's time to go further and introduce estimated delivery times and specify that the current situation will create uncertainty. While you are at it - Contractor's suspension rights. Do you have it at all, and what are the terms for invoking them?

Introduce and be transparent on the need for flexibility in manning clauses. With the current sick leave rate and uncertainty with respect to quarantine decisions, closed borders and curfews, this is not unheard of. Try to avoid key-man clauses or soften them up with language that makes it harder for your customer to establish breach of contract if you need to put in other resources.

Lastly, under the current situation it could be argued that liquidated damages should not be a part of the contract. It's a tough one, but there are compelling arguments right now for saving that for another day. If this is not possible, you will surely find it very helpful to include an effective grace period to soften the schedule if needed, preferably combined with a lower daily percentage than normal. Oh, a proper cap on liquidated damages is always called for, but even more important in the time of Corona.

The good news is that there is fertile ground for having these discussions with your contract partners now. Everybody knows about the uncertainty and most are focused on accommodating customers and suppliers in order to secure future business. That window will probably close, so eat it while it's hot.