What began as whispers of a new deadly virus from Wuhan has now become a global crisis. On 11th March 2020, the World Health Organization declared COVID-19 a pandemic. As nations of the world are going into a lockdown and closing their borders, economic activity has come to a screeching halt. The COVID-19 Pandemic will cost the global economy trillions of dollars this year alone and that is just the tip of the iceberg. With supply chains drying up, the impact on business will be substantial and long lasting.
Due to this disruption, many companies are re-assessing their contracts to understand the extent of their rights, remedies and obligations with respect to their business partners. This pandemic has brought to fore a set of critical clauses related to force majeure, liability, insurance, and termination etc. that normally never go into effect until unforeseen circumstances as the world is experiencing now. This will result in multiple amendments and contract rescheduling that puts your business at risk. We ourselves are observing a lot of action in procurement contracts of late. Our contract review and analysis solution Nia Contracts Analysis is seeing a huge uptick in requests targeting clauses related to business continuity, force majeure, obligations, rights, liabilities. Businesses are looking for help in the areas of:
A common legal clause, but usually hidden in your contract documents, is the force majeure. It is not triggered until there is an unprecedented and extraordinary circumstance or event. It allows either party to limit their liability in the face of such an unforeseeable event (sometimes referred to an Act of God) that hampers their performance.
As a result of COVID-19, we are already seeing force majeure, non-performance, and termination rights clauses getting triggered across industries for procurement and sales contracts. However, force majeure isn’t restricted to pandemics and can be triggered during wildfires, floods, hurricanes, and other natural disasters or unprecedented events like terror attacks.
One of the key questions facing business leaders today is the contractual risk that force majeure presents to their business. If a supplier invokes this clause, do they have a fallback option? What, if any, are potential remedies to non-performance? Is there a timeframe for avoiding cost overruns and losses? What are the other rights and obligations? Is there an impact on the cost? Is there an insurance component and if so, what is the process for filing claims? What happens if force majeure continues for an extended period of time?
Take for instance a car manufacturer who depends on an OEM for spark plugs. That OEM in turn depends on a supplier for materials. In the present situation, if the OEM invokes force majeure citing pandemic conditions and their inability to deliver spark plugs due to material shortage, the car manufacture’s business suffers. In this case the car manufacturer needs to review their contract to identify alternative means to perform contractual obligations or proactive steps that can be taken or enforce specific performance of contract.
So, if the reason force majeure is triggered is because the OEM is not able to get materials from the supplier, the car manufacturer can ask the OEM to look for another source of materials or renegotiate the terms of the contract if the parts have become expensive due to the shortage, or review alternative remedies to contain the business impact.
Another example is insurance. Do your contracts adequately cover losses arising out of another party’s inability to fulfil contractual obligations due to the pandemic? Do you have specialized insurance that covers business interruptions due to force majeure or trade disruption? Companies must quickly evaluate insurance contracts for specific terms and conditions to determine coverage and ensure they are filing the claims within required notice provisions.
For the sell side as well, the risks are high. To invoke the clause, specific force majeure events have to be explicitly mentioned in the contract, creating a grey area. Refusing to perform a contract, even during the COVID-19 crisis, without a valid legal reason comes with its own set of risks. Fulfilment has to be viewed as an impossible feat, and not just impractical – so fear of safety and raised prices do not qualify. If not legally sound, the refusal could see you burdened with substantial damages and loss of business due to potential termination for breach of contract.
Similarly, businesses need to undertake contract analysis to understand rights and obligations, liabilities, notice requirements, and analyzing potential causes of breach etc. There are many legal angles that need to be vetted and any oversight could come with a high cost.
Business contracts worth millions of dollars are not easy documents to navigate and are high risk ones. Apportioning the risk, getting the required intelligence by manually reviewing a large number of contracts quickly, creating appropriate amendments or deciding termination, suspending performance, or for that instance drafting a perfect contract manually can take months – time that businesses in the present situation just can’t afford to waste. And even then, the probability of human oversight is high.
Nia Contracts Analysis is an enterprise-grade AI offering that leverages advanced Machine Learning (ML) techniques such as vision, semantics, language sequence to help customers across industries to derive insights from their contracts and legal documents. Nia Contracts Analysis makes it easy for business, procurement, and legal teams to read and interpret the contract documents, navigating the complex hierarchy between the contracts, their sub-agreements, and related documents with ease.
Given the current crisis our clients are facing, we have created a Nia Contracts Analysis solution for them. It is backed by 500+ legal AI experts with deep industry domain expertise, and our advanced AI & ML technology stack. Nia Contracts Analysis can quickly and accurately digitize and identify all force majeure and related clauses in a contract, enabling our clients to take appropriate action/decisions to ensure business continuity. Nia Contracts Analysis performs AI based abstraction of key clauses across various contract types, capturing variations in language by simulating human cognitive functioning, performing various tasks with a combination of technology and human intervention.
We can help you identify and mitigate risks in your supplier contracts to ensure that you complete your contractual obligations by helping you:
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Are you looking to understand the risk force majeure and other clauses in your contracts poses to your business? Click here to reach out to us and request a callback.