By Pete Maguire, partner in the commercial contracts team at Wright Hassall
The focus on the far-reaching effects of coronavirus appears to have shifted from healthcare worries to economic woes, with the financial impact creating a period of instability, particularly throughout supply chains.
With more sectors looking to get back to work, it is hardly surprising that businesses in survival mode are looking to protect their interests and reduce risks, with a review of their existing commercial contracts essential.
Few contracts will have been written to mitigate the risks of a global pandemic, with months of lockdown and social distancing, but understanding its impact on commercial relationships and the ability of a business or its suppliers to fulfil their contractual obligations, is currently key.
Businesses must be close to their suppliers and customers, like never before. They have to understand the pressures everyone is facing in the current climate and the impact a failure by any member of the supply chain would have both commercially and practically.
Key Contractual Points
The relationship between a Facilities Management Provider (FMP) and its customer is often completely different from that you may find in a standard supply agreement. Personal interactions are often critical and maintaining the relationship is essential.
From the FMP’s perspective, whilst it is critical to ensure that your exposure is as limited as possible in the current climate, what is equally as important is to ensure your customer does not feel exposed by the approach you take.
Being seen to mitigate costs and coming up with proposals will stand the relationship in good stead, whilst enhancing the feeling of mutual trust between the parties.
In terms of the contract itself, the first important consideration is whether it contains a force majeure clause and if so, does it extend to the impact of the pandemic?
Whilst the FMP should certainly consider this clause and whether the current circumstances could trigger it, they must ask themselves if it will be in their long-term interests to do so.
The impact of a force majeure clause can sometimes be draconian and can potentially lead to an immediate termination of activity, which presumably, will not be in the interests of either party.
How To Address The Necessary Variations
Instead of jumping straight to the triggering of the force majeure clause, it may be possible to make use of the variation provisions in the contract. This will enable any additional costs incurred to be recovered by the FMP.
If the costs incurred under the contract are driven by people costs and if it’s possible to flex resources, but have additional costs picked up by the customer, this would be a sensible option.
For example, the service provider may be able to recover redundancy costs in some circumstances, if the contract allows it.
Some contracts will have a formal change control procedure which sets out the process to be followed and it would be worth checking to see whether the customer is entitled to withhold its approval of any changes proposed.
The critical point here is to try and find a way of ensuring that a contract remains financially viable. The contract will usually set out how a variation should be documented, but even this can vary.
If the contract is silent in this respect, then the accepted position under English law is that any variations would need to be agreed between both parties, rather than imposed by one or the other.
When variations to the contract are agreed, these should be documented carefully, detailing whether they can be agreed verbally or whether they need to be in writing and signed by both parties.
Mitigating Losses And Managing Relationships
For a service provider, to effectively mitigate their losses, it’s important to understand how their charges are calculated, and whether it’s an open book arrangement or cost plus.
Cost plus is a common form of charging and it may be possible to mitigate costs by making use of this mechanism, particularly if the supply chain costs increase as the costs of materials are impacted by the pandemic.
When it comes to managing ongoing commercial relationships, it’s important to assess both supply contracts and commercial contracts, as there may be flexibility allowing for volume related price reductions.
In any event, if a service provider can reach an agreement with suppliers that enables it to keep costs to the customer down, this can only improve the relationships with customers.
It’s Always Good To Talk…
The single most important issue for FMPs to consider is not necessarily the contract itself, but the day to day relationship with the customer.
FMPs tend to be unique in that they will be in regular contact with the customer, talking with them on a daily basis, whether it’s the security staff, cleaners, reception workers or maintenance support – all of these roles are on premises throughout the week.
Therefore, FMPs have more opportunities to build close personal relationships than other service providers do, so it’s important that they take full advantage of this.
For this reason, you should open a dialogue as quickly as possible if you think there is any possibility of issues in meeting your contractual requirements.
Given a good working relationship and a customer who may also require flexibility, then collaborating to find an equitable outcome, with the contract as the foundations for that relationship, businesses could emerge from the crisis in an improved position.