COVID-19: what do you do when you can fulfill some, but not all, of your business-to-business contracts?
The impact on the legal and business landscape from COVID-19 has been unprecedented and introduced much uncertainty, particularly around supply chain disruption. This article looks at practical considerations when you can fulfill some, but not all, of your business-to-business contracts.
COVID-19 has decimated supply chains for goods and labour across the world; rolling quarantines and local lockdowns will likely continue this trend. Many businesses now face the same dilemma: what to do when you have enough resources to fulfill some of your contracts, but not all?
There may be no specific legal principle that tells us how to make this decision. Rather you will need to conduct a careful balancing act based on your organisation’s specific circumstances and industry considering the dimensions of risk, profit, ethics, and the public good.
The first and the best course of action may be to communicate honestly and openly with your customers. Negotiating a solution that allows both your organisation and your customers to survive as businesses, regardless of the contractual terms, maybe best for everyone, including shareholders.
But what to do beyond this?
In making that decision there are several key questions to ask which will help you weigh up all the important factors.
Looking to the contractual terms themselves, determine whether they contain preferment-type clauses requiring you to prioritise that contract over others. Perhaps your contracts have good-faith obligations that could be breached if you decided to favour more lucrative contracts. In any event, consider the implications of a breach: which contracts have the harshest consequences in such an event? Conversely, determine which of your contracts provide the greatest rewards for delivery.
Looking again at any potential losses, you may have contracts that contain useful limitations on liability and cap your losses at an acceptable rate. You may have litigation and/or business interruption insurance policies to cover your losses. In any event, early engagement with your broker and insurer is essential.
Knowing your customers is always important for any business, during a crisis, it can be critical. Which of your customers are most likely to make a claim? Which of your customers is most likely to be best able to bear your failure to deliver? Your course of action with one particular contract over another could have serious reputational impact on your organisation, so keep that in mind when making decisions. Thinking about public perception of your organisation, it is also worth considering whether any of your contracts have a moral imperative, or public policy element.
Ask whether it is better to under-deliver to all your customers equally or fail to deliver to some so that you can complete others? The advantage of the former case is that it would probably not amount to a repudiatory breach, so claims would be for damages, rather than termination of any long-term supply arrangements. The disadvantage of the former is that all your customers would be able to claim for damages, rather than only a handful.
If you are dominant in your market, how you choose to fulfill orders may fall under competition regulations. If this applies to your organisation, you should take specialist legal advice on how to proceed, bearing in mind that the rules on price-fixing and price-gouging will still apply.
Finally, documenting any COVID-19-related constraints you encounter in your decision-making process with contemporaneous evidence can also be a vital tool, ensuring that important knowledge isn’t lost. In difficult economic times, the likelihood of redundancies also means a likely loss of knowledge. However, there is a risk those same documents may be disclosable in court and undermine any defense you wish to run.
These questions are not exhaustive and there will always be industry and business-specific considerations, but this should provide a strong starting point for reviewing your position in alignment with your values and strategy.
About the author:
Becky Annison joined Practical Law in May 2018 as a senior editor in the In-house team and is a host on the Thomson Reuters legal podcast, The Hearing. Prior to that, she worked as a senior solicitor with Carillion plc for 12 years specialising in outsourcing contracts and risk and compliance issues. While at Carillion, Becky gained her MBA in Legal Practice and was a member of the Carillion Advice Services legal business steering committee pioneering innovative ways of delivering legal services.