With businesses struggling to make ends meet during this crisis, many business owners are reading the fine print in their supply chain contracts to understand their negotiation leverage with suppliers and customers. The focus of this months’ article is to go over some of the key contract provisions that you should be aware of during a crisis. Consider including these when developing new contracts. Companies should be reviewing their contracts with suppliers to understand the effect that COVID 19 may have. Listed below are key provisions:
- Force Majeure
- Indemnity and Limitation of Liability
- Business Continuity/Disaster Recovery Plan
A force majeure clause is typically included in contracts to protect and account for external circumstances resulting in a suppliers’ lack of or nonperformance. Depending on the provision language, it might be left to both parties to determine the events that fall under this clause, unless it is specifically outlined. An example would be war, natural disaster/Acts of God, strikes/labor disputes, etc. If your supplier is relying on this provision to protect them, they should provide you with relevant information that confirms they have not been able to deliver and or perform to the contractual scope due to COVID 19.
If this is the case, you should ensure that a Force Majeure clause is included in the contract along with a mitigation plan in the event of such an occurrence. Having this provision in your contract can minimize anxiety and frustration for both parties.
Indemnity and Limitation of Liability
Check this provision to see if either party (you or the supplier) are liable to compensate another in the case of an event resulting in business interruption or breach. What is the limit of the liability outlined in the contract? For example, is there any financial cap on losses? If a supplier is unable to provide a service or product to you during COVID 19, they may be in breach of the contract. The limitation of liability limits your responsibility for breaches.
All companies have general liability insurance and additional insurance coverage that is deemed appropriate for the type of service that they are providing. In the case of COVID 19, the supplier may have insurance that protects them from such a crisis. Will business interruption insurance cover financial losses due to COVID 19?
Business Continuity/Disaster Recovery Plan
Review your own business continuity and disaster recovery policies and those of your strategic suppliers. Make sure that these plans are appropriate, align with your current environment, and are active in order to reduce the impact of the event (in this case COVID 19).
Work closely with your suppliers throughout this crisis. Relationships are key and relying on each other for support and cooperation will make this much easier and less stressful for both parties. Remember we are all in this together!