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Future Proofing Your Commercial Contracts
June 15, 2022
The commercial world is continuing to manage the long-term effects of the Coronavirus outbreak as the knock-on effects of international lockdowns continue to contribute to shortages of materials and the availability of labour. In addition to this, the post-Brexit landscape continues to take shape with new import and export procedures taking time to bed in. Increasingly rising fuel and energy costs are also hiking up production costs.
It is therefore more important than ever for businesses to plan for the future. One vital step towards long-term planning is for businesses to consider how to future proof commercial contacts from long-term consequences of inflationary markets.
Below are some legal and practical considerations for businesses attempting to future proof its commercial contracts.
Payment provisions
Suppliers will want to ensure prompt payment from its customers. Ensuring that contracts specify clearly and unambiguously when and how payment will be made is vital to avoid any unnecessary delays in payment. Suppliers should consider if they need full or part payment upfront – particularly taking into account its supply chains. Suppliers who take payment following dispatchment of goods or otherwise after the delivery of good/services should consider when the invoices are due. In commercial contracts, payment terms often range from 14 to 30 days. Suppliers should consider how long, in practice, they can wait for payment from customers and the likely delays on its operations for late payments.
Price uplift clause
In light of increasing costs of fuel and energy, suppliers will want to ensure that its contracts allow it to adjust product prices in order to pass on the changes to the costs of manufacturing and supplying the products. This is particularly important in long-term supply agreements.
Accordingly, suppliers should ensure that its long-term supply agreements contain clauses providing for the adjustment of the product prices during the term. Price changes are often linked to a price index, such as the Consumer Prices Index (CPI) or the Retail Prices Index (RPI). Suppliers will need to consider which is the most appropriate price index to use to assess price changes.
From a customer perspective, if you are agreeable to a price adjustment clause, then consider a cap to limit the total upwards price adjustment during the contract’s term. Alternatively, consider whether no price change can be made until there is a specified minimum change in the relevant index.
Force majeure
A force majeure clause typically excuses one or both parties from performance of the contract in some way following the occurrence of certain events outside a party’s control. It can be useful in managing future risk under commercial contracts. Businesses should consider what events are covered by the clause and whether it would benefit them to broaden the clause, for example, to include disruptions in its supply chain. Since the Coronavirus outbreak, suppliers are typically negotiating for events to cover pandemics and epidemics as well as actions taken by governments in response to pandemics.
Material adverse change
A material adverse change (MAC) clause is similar to a force majeure clause in that it is used to protect parties against the risk of unforeseen events or circumstances. However, a MAC clause tends to focus on very specific events and sets out in detail the consequences on the occurrence of a specific event. For example, a supplier may be concerned that if another Covid-19 related lockdown occurs either nationally or in a country where it imports goods, then this may affect its ability to obtain the raw materials required to supply a product. If its supply chain is therefore disrupted in this way, the contract could deal with what will happen in that situation and set out the obligations of the supplier.
MAC clauses can therefore be a useful tool to manage risk. Precision, however, is vital when drafting specific MAC clauses. It needs be clear how a MAC clause is triggered.
Business continuity plan
It is good practice for businesses to have in place business continuity procedures to deal with the risk of major operational disruptions. For instance, disaster recovery plans are often in place to ensure that services can continue if there is an event that affects a service, such as a utility failure.
A business continuity plan (BCP) should describe the processes and procedures that will be implemented to deal with an unplanned disruption in service and aim to minimise the adverse impact of such a disruption so that business-critical functions can be maintained or quickly resumed.
Businesses should review its own BCP to determine whether it addresses disruptions caused by the Coronavirus pandemic. They should also consider if any of its suppliers are providing time-critical services and check if they have business continuity / risk management plans in place.
Businesses entering into a new contract, or entering into negotiations for a renewal, with key suppliers should consider including BCP provisions requiring suppliers to maintain and regularly test an agreed BCP.
For more information about the above or a related matter, get in touch with Emily Shingler on eshingler@darwingray.com or 02920 829 102 for an initial free, no obligation conversation.
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