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As the COVID-19 pandemic unfolds, many businesses are
experiencing challenges managing their contractual obligations with
customers and suppliers. With unprecedented disruption to supply
chains, businesses are being forced to assess risk exposure at all
levels of their supply chains and to consider whether their
suppliers, their customers, or they themselves, can comply with
their current and future contractual obligations. For many
businesses in Australia, this follows the strain that has already
been felt in the wake of the recent bushfires and floods.
In this alert, we look at the steps you should take to assess
your risk exposure and your options if you cannot fulfil your
Reviewing your contractual obligations and assessing
your risk exposure
With respect to each supplier/customer contract, you will need
to review your contractual rights and remedies so that you know
what protections you have and consider whether you are able to
fulfil your contractual obligations under that contract.
You may need to prioritise which contracts you review first by
focusing on the contracts which are most critical to your business
and which you are most at risk of breaching.
Some of the contractual terms you will need to consider are:
It is important to understand exactly what your commitment is
under the contract, whether there is a fixed ongoing minimum
commitment, or whether your commitment is determined on an
order-by-order basis. You should also consider whether there are
any performance metrics and what the consequences are if you do not
satisfy the performance metrics or are unable to fulfil the
Identify whether there are fixed timeframes or whether the
contract sets out processes for dealing with delays, cancellations
or for requesting extensions.
Disruption to your supply chain could result in increased costs.
Consider whether there are mechanisms for reviewing, adjusting or
varying prices and conversely whether your suppliers or customers
have any similar rights.
Many businesses are already experiencing delays in payments and
are renegotiating credit terms as a result of the current economic
environment. You will need to be familiar with the payment terms in
each of your contracts and the consequences for not paying an
invoice on time, for example a contract may allow for interest to
be charged on any unpaid amounts, or for a party to have a
termination right in the event of late payment. You should also
note whether any security has been given under the contract and
when a party can exercise their rights over that security.
It is important to understand what will constitute a breach,
whether there are different types of breaches, the process for
notifying a party that a breach has occurred and whether the party
in breach of the contract will have an opportunity to rectify the
breach. You should also be aware of what rights the non-breaching
party has in the event that a breach occurs, for example, they may
have a right to terminate the contract.
You should know your liability position under each contract as
this will be important in assessing your risk exposure. A contract
may contain provisions that limit a party’s liability by
excluding certain types of loss (such as consequential or indirect
losses) or by capping a party’s aggregate liability under the
What should you do if you cannot fulfil your contractual
If you are unable to fulfil your current or future contractual
obligations then you will need to consider whether you are able to
negotiate a commercial solution or whether you are able to vary,
suspend or terminate the relevant contract.
Some of the options that might be available to you are:
Mitigating your loss
You should continually assess your loss mitigation strategies
and put additional measures in place as necessary. This is
particularly relevant during the COVID-19 pandemic as businesses
may find that they need to show evidence of how they were affected
by COVID-19 and how they mitigated against the loss that they
suffered as a result of COVID-19.
Negotiating a commercial solution
Depending on the relationship you have with your
suppliers/customers, you may be able to raise the issues you are
experiencing with them for the purpose of negotiating a commercial
solution. This may offer a quick and practical way of dealing with
short term or immediate issues, but may not be appropriate for
ongoing, long term commitments. If the parties agree to vary or
change any terms of the contract, then that variation should be
documented in a deed of variation or amendment signed by all
Suspending or postponing performance
Depending on the terms of the contract, you may be able to
suspend or postpone your performance of your contractual
obligations where your business has been impacted by an unforeseen
event or circumstances beyond your control. For instance, if you
are prevented from fulfilling your obligations under a contract as
a result of the COVID-19 pandemic and the contract contains a force
majeure clause, you will need to check whether “pandemic”
constitutes a force majeure event and whether you are required to
provide any notices or take any specific steps in order to seek
relief under that clause. You may still be required to mitigate
your loss during a force majeure event. A contract may specify that
it can be terminated where a force majeure event continues beyond a
specified period of time.
The grounds on which a contract can be terminated will vary from
contract to contract, and parties to the same contract may have
different rights when it comes to their ability to terminate the
contract. In some situations it may be possible for you to
terminate only part of a contract (for example, you may no longer
be able to supply your full range of products, but can still
continue to supply a reduced offering) or a purchase order under a
broader head purchase agreement. The consequences for terminating a
contract may also vary depending on how the contract was
terminated, which could impact your risk exposure.
Dispute resolution process
Most contracts set out the process that the parties are to
follow in the event of a dispute. It is important that you are
aware of this process as you may be required to provide or receive
certain notices or take certain steps within specified timeframes.
Dispute resolution processes generally require parties to negotiate
or mediate a dispute before commencing proceedings in court. This
gives the parties an opportunity to agree on a mutually acceptable
solution before resorting to arbitration or litigation.
After reviewing your customer/supplier contracts you may find
that they do not contain certain rights or remedies that would be
beneficial for your business. Before entering into any new
contracts you should check that they contain appropriate rights and
remedies and you should also make sure that any template contracts
used by your business are updated accordingly.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.