Understanding Contractual Rights and Obligations During a Crisis

by Jarrod McAdoo

In a previous blog we discussed the mounting humanitarian crisis that the Coronavirus, also known as COVID-19, had sparked globally and discussed considerations and steps organizations should take to mitigate the impact from disrupted supply chains.

How things have changed in the six weeks since we first discussed this issue with COVID-19 impacting the global community in ways many of us have not seen or imagined personally and professionally.

Intermixed with the enormous human tragedy, business disruption, and economic impacts, we are seeing some rarely used and often overlooked contract clauses triggered to help organizations protect themselves and minimize losses.  Specifically, we are witnessing a growing number of companies invoke force majeure or “acts of God” clauses on a global scale to get relief from contractual obligations.  Most recently, CEVA Logistics and DHL Global Forwarding two of the world’s largest logistics companies announce force majeure actions to their carriers and logistics service customers.

Under a force majeure declaration, organizations reserve the right to be excused from performing contractual obligations that have become impossible or impractical due to an unforeseen event.  This could mean that organizations may not receive their goods or services, or a declaring agency reserves the right to change the conditions of purchase, work procedures, price, lead-time, surcharges, business operations and obligations in response to the circumstances.

While the concept of force majeure and the inclusion of these types of contracts is widely known and accepted, what is not widely accepted is the interpretation of these clauses.  When organizations interpret the clauses differently and need to turn to the courts or mediation, they can find themselves engulfed in a myriad of legislative, regulatory, and common law doctrines that can define events differently by industry and jurisdiction.  In order to mitigate or minimize these types of disagreements and manage impacts, it is critical for organizations to be able to quickly identify contracts that are impacted as well as quickly identifying the contract language for force majeure in each of these contracts.

In these cases, the value of having a contract management process that has been completely digitized is evident.  When organization have their contracts digitized and stored in a searchable repository, organizations can pull affected contracts quickly and quickly review not only force majeure clauses, but also clauses for termination, cancellations, refunds, penalties, and applicable law.   When time is of the essence to assess impact and develop recommendations, a digitized contract management process can complete a task in minutes that may have otherwise taken days.

COVID-19 will undoubtedly alter many business processes moving forward and has already reinforced some best practices exposed opportunities for lessons learned.  In this specific case, one of these best practices and lessons learned is for more organizations to understand the clauses and nuances contained in their contracts as well as having a having a way to access and analyze impacted contracts and associated contract clause efficiently and effectively when the unforeseen occurs.

Learn more about managing the full lifecycle of your contracts with Ivalua’s Contract Management solutions.