Bracing for Impact: Are Your Contracts Protecting Your Business Against Acts of God and Other Such Quandaries?

COVID-19 has upended the supply chain and with it, businesses big and small. These include critical service providers and enterprises, which form the founding pillars of society – from healthcare and agriculture to banking and pharmaceuticals. COVID-19 affects us all; doesn’t matter if you are on the buy-side or the sell-side.

But the world must continue to spin, and businesses must continue to operate even in the face of great adversity; and contracts will help ensure that they do.

What to Look for When Things Go Wrong

This is where, first and foremost, force majeure clauses come into play. While most commercial contracts contain a force majeure clause, it usually features as a “boilerplate clause”, which is rarely scrutinized or heavily negotiated because – let’s face it – we don’t pay much credence to the possibility of a massively disruptive event such as the COVID-19 pandemic occurring.

Whether or not a force majeure clause will be effective within the context of the current COVID pandemic largely depends on the wording of the clause, if the contract includes such a clause at all. Considering that force majeure clauses don’t have a set standard in terms of how they are worded, it comes down to the contracting parties to decide what comprises a force majeure relief event and how the relief mechanism can be triggered. As a result, all existing contracts will now need to be reviewed and assessed on a case by case basis.

Even if a contract includes a loosely worded force majeure clause or doesn’t contain one at all, most businesses would still be obliged to include clauses specifying business continuity plans (BCPs) to mitigate the possible risk arising out of foreseeable operational disruptions.

Considering how the COVID pandemic is already triggering labor and materials shortages, both sell- and buy-side enterprises need to review whether they have business continuity obligations in place. For sell-side operators especially, they need to ensure that they are following all necessary processes required by their customer contracts and maintain an audit trail of what they have done so that they are able to demonstrate compliance.

And considering that no business could have planned ahead to mitigate the impact of COVID-19, they will need to review their contracts for not just FM and BCP clauses, but also take a deeper look at insurance, disaster recovery and other compliance-oriented clauses such as governing law, confidentiality and data protection.

What to Do When Things Go Wrong

Now all of this is easier said than done, especially when there are manual processes in place for contract review and performance data reconciliation. Legal teams are already stretched thin and paperwork is easily lost.

The quickest way around this problem is to move the entire enterprise contract library to the cloud by using OCR or similar scanning technologies to transform existing and legacy contract documents into easily accessible, machine-readable formats. This entirely eliminates the need to trudge through email attachments and bulky files while trying to pull documents for review. Once contract documents have been digitized, the next logical step would be to use an AI-led natural language processing engine to extract contract metadata, clauses and obligations and organize them into predefined taxonomies to enable easy searchability.

And, a contract document that has been broken up into its essential components, labeled, and organized can be searched! From thereon, it is just a matter of pulling up an active contract, keying in the right terms and reviewing the force majeure clause and business continuity obligations to discover your rights as a buy-side customer or your liabilities as a sell-side operator.

When a contract document and its metadata become searchable, it enables you to also identify those contracts that don’t have a force majeure clause or business continuity obligations baked into them. Armed with that knowledge, you can immediately initiate a negotiation process to have the contract amended using the change request function we discussed in a previous post.

Sirion’s AI-powered CLM platform offers an integrated solution for managing risks across your contract portfolio – from digitizing the entire contract portfolio and auto-extracting metadata, clauses, obligations and other key information from these contracts to leveraging BI-powered analytics for quick risk assessment across the entire portfolio and effectively managing the process of contract change management to mitigate the identified risks. Drop us a quick note to learn more.