Contractual performance in turbulent times: Some recommendations for businesses

At Bird & Bird, it’s our job to understand the commercial framework in which our clients operate and adapt our approach to contracting according. Lawyers from our Commercial, Finance and Dispute Resolution teams recently came together at an internal session to share their views on how contracting is being affected by economic and global factors, the various challenges that our clients are facing in performing their existing contracts in an uncertain world and how we are helping them to manage those changes.

Our panel of lawyers was made up of: Simon Shooter and Ronald Hendrikx, partners in our Commercial team; Jennifer Bird, Legal Director in the Finance & Financial Regulatory team; and Jonathan Speed, partner and Russell Williamson, senior associate, both from our Dispute Resolution group. 

Below we list our panel’s recommendations for businesses (i) at the pre-contract stage when there is much uncertainty about future economic conditions (Recommendations 1 – 4) and (ii) where existing contracts have become difficult (or impossible) to perform as a result of a change in circumstances outside of the parties’ control (Recommendations 5 – 7). 

Pre-Contractual Recommendations

Recommendation 1: Think carefully about force majeure clauses - don’t treat them like a regular boilerplate clause 

During pre-contractual considerations and negotiations, in drafting the force majeure clause a party should always:

1. Review force majeure clauses carefully. In some situations, longer-form force majeure clauses may be required to deal with all the situations within the sphere of influence of the parties. Ronald from our Commercial team says:
   
   ‘In the last two or three years, we’ve had major shocks to the system in the sense that people have been forced to rethink supply chains, costs, pricing profile, and availability of goods. Specifically, in response to the COVID-19 Pandemic, we’ve seen a rise in the use of the term ‘pandemic’ in force majeure clauses’.
   
   
2. Ascertain what the true impact is of any government sanctions or rules that are used as triggers, e.g. a party should be certain about whether the force majeure clause bites when action is ‘advised’ by government or strictly ‘prohibited’.
   
   
3. Consider carefully the use of the terms ‘prevent, hinder or delay’ – the three terms can be construed as a sloping scale of what the impact of the force majeure event is on the contract and the ability to perform the contract. 
   
   
4. If possible, define the degree to which the party attempting to rely on the force majeure clause needs to have mitigated the effects of the force majeure event – there can be an implied duty to mitigate,^[1] but often parties themselves will make it a condition of the clause. 
   
   
5. Consider the wording of any notification requirements. This is important because a party must ensure they follow any duty to notify accurately and speedily to avoid inadvertently giving up rights.

Recommendation 2: Avoid drafting that is too specific

There can be pitfalls to drafting too specifically. Parties should make sure that they draft into contracts measures that are consistent with market practice. Simon says:

‘Trying to be too accurate where you are trying to foresee exactly what may happen in the future is not going to work very well, so we are going to have to come back to some generalities.’

Recommendation 3: Don’t be afraid to suggest amendments to standard clauses 

Jennifer spoke specifically about contractual drafting in finance documents. In these agreements, there isn’t usually the concept of force majeure, primarily because a borrower’s obligation to repay a loan will survive whatever event or circumstance befalls the borrower. Instead, under such contracts a borrower will look to employ a ‘material adverse effect’ (“MAE”) concept, which is used to qualify certain of their representations, undertakings and the events of default under a facility agreement, so as to reduce the likelihood of inadvertent breaches thereunder. A lender may look to include a material adverse change (“MAC”) event of default, which is triggered where the occurrence of an event or circumstance has or is reasonably likely to have a MAE on the borrower . The extent to which a borrower will be able to negotiate the MAE definition and related provisions depends on its bargaining power, the sector and the jurisdiction in which their business operates.

A borrower or lender should seek to negotiate the definition of MAE to make it more favourable to their position. Jennifer emphasised the value of a well drafted MAC event of default, which makes use of the MAE…