Has COVID-19 encouraged you to reconsider your outsourcing needs? If so, it might be time to quarantine your outsourcing agreements and give them a health check. Below we have tracked-and-traced a list of considerations to help you to isolate any potential areas in those agreements that may need sanitising.
It always makes good sense to review your outsourcing agreements periodically, especially if your business relies heavily on outsourcing business-critical functions to third-party suppliers. The time for review is usually when those agreements are coming up for renewal or in the event you are considering appointing a new supplier. Of course, COVID-19 has introduced new and unpredictable challenges and as a result, some businesses have naturally turned more towards outsourcing functions to reduce in-house resources, while some have encountered service delays and disruption. Further, as day-to-day restrictions continue to be imposed on businesses to varying degrees, it is vital that such contracts are reviewed.
What to consider reviewing or adding to your existing agreements
Termination for convenience - you will have, or are likely, to have seen more customers bargaining for the right to terminate for convenience in light of the unpredictable economic landscape in which we find ourselves. This may require renegotiation of a notice period, transition of services or introduction of a termination fee.
Material adverse change - you are also likely to see parties negotiating for the right to terminate or suspend services upon a material adverse change or event. Suppliers may also want rights to increase charges if their costs increase due to a material adverse change.
Termination rights for insolvency related events - naturally, COVID-19 has resulted in many businesses refinancing, taking out loans or similar, and so some insolvency-related termination clauses may need to be updated.
CORPORATE INSOLVENCY & GOVERNANCE ACT 2020
This is new legislation that came into force on 26 June 2020 directly as a result of the COVID-19 pandemic. It seeks to assist companies in financial difficulty caused by the pandemic and subsequent economic crisis by introducing a number of new insolvency and moratorium procedures. It is notably very 'debtor friendly'.
Pre-pandemic, when companies enter into insolvency or restructuring procedures, their suppliers generally had the right to terminate any contract they had with that company as per a standard termination clause in supply contracts. However, under this new legislation, suppliers cannot terminate where the struggling company has entered into those procedures directly due to financial difficulties suffered as a result of COVID-19. There are some exceptions, for example, for small suppliers, but all suppliers should be aware of these restraints because it is not possible to expressly contract out of the 2020 Act. As an alternative, suppliers could consider imposing financial reporting obligations on their customers or drafting termination for convenience clauses (i.e termination without reason within a set written notice period) into their agreements.
Suspension rights - on a more general basis than 'material adverse change', in light of the ever-changing government guidelines and imposition of lockdowns, suspension of performance may be inevitable. Parties may therefore bargain for more flexible suspension rights on such events. You should consider how far such a clause should go or whether you would want to allow suspension only in the event an area enters Tier 3 or a 'circuit-breaker' lockdown, for example.
Business continuity/disaster recovery - it is always best practice to put the obligation on your suppliers to review and update business continuity/disaster recovery plans regularly, but this is even more important during the pandemic. If possible, you should consider adding obligations for organisations to carry out widespread testing of remote working capabilities/remote supervision technology if applicable.
Force majeure - force majeure clauses allow a service provider to be completely relieved of their contractual obligations upon certain events, eg natural disasters, pandemics etc. If you would like COVID-19 to be considered a 'force majeure event', it is best practice to now ensure that said pandemic is expressly stated in your agreement to be such.
You may find that some businesses are able to continue their obligations under a contract even upon the occurrence of a force majeure event despite being indirectly affected by said event (ie suffering a financial hit). Such businesses may prefer to suspend the contract, as mentioned above. However, in standard-word force majeure clauses, there is not normally a right to suspend obligations, unless this is directly due to the force majeure event itself (ie in this pandemic, many exports from overseas were suspended which directly affected many businesses' ability to perform their obligations under certain contracts). The pandemic may therefore lead to more detailed, nuanced and wider force majeure clauses where the impact of a force majeure event is laid out, as are various suspension rights depending on that impact.
Inspection rights - customers may also be keen on increasing their inspection rights in order to allow them to check that their supplies and supply procedures are adhering to applicable COVID-19 laws and guidelines, for example, social distancing guidelines. They may wish to introduce suspension or investigation rights where it is found on such inspections that things are not up to scratch.
The key issues will of course depend on the particular nature of the outsourcing contract, its criticality and whether the review is from a supplier or recipient perspective. Whatever the context, there is no doubt that providing clarity in the contract and addressing issues head on can remove or diminish the likelihood of disputes or litigation down the line, and can also minimise significant financial risks for the business.
Do not wait for an outbreak of problems to test your outsourcing agreements - let us know if we can help and provide the vital vaccine to prevent them from ever occurring.
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.