How to negotiate coronavirus contract disputes

posted by Martin Noble
5 May 2020

Covid-19 is putting pressure on all areas of the UK supply chain. With no clear end in sight, and cash flow coming to a stand still, many businesses are having to look to their contracts to find a way to ease the strain.

Conversations about money issues can be difficult, no matter where in the supply chain a company sits. They can cause tension among contractual relationships, and potentially lead to disputes arising, but they are also essential. So, how can businesses resolve any disputes that occur without having to go to court?

There are several clauses which businesses may consider invoking if they find themselves struggling to cope financially. Arguably the most relevant at this time is force majeure, which excuses one or both parties from carrying out their obligations in some way, due to a disrupting event making it impossible to function normally. However, if the other party finds a counter argument, this could lead to a costly dispute and cause issues for both the parties involved, as well as those further down the supply chain.

Thankfully, there is the option of taking a good faith approach instead. This can be a wise move for supply chain professionals, allowing a way forward to be negotiated, not argued.

Currently, every business is under the same strain, creating a rare opportunity for mutual understanding. By being transparent about their own situations, those in the supply chain can work together to find a practical solution to the problems they are facing.

Before any form of action is taken, suppliers and customers should investigate when their contract is coming to an end. If it is due to come to a close soon, this offers a natural conversation starter to discuss changes to the agreement in future. However, if there is a still a way to go, the contract might have some flexibility built into it, if it is a framework agreement, for example. This could enable one or both parties to reject orders if they cannot afford them or wish to adopt new terms. If not, then it is worth discussing whether the agreements can be altered to provide more leeway in the current economic environment. If one party has not paid, then suspending the contract might allow sensible negotiations for future trading to take place, too.

As well as changing current agreements, negotiation can also be used by businesses to agree any clause that works for them, which they should then document in writing. The agreed terms can be temporary, and do not have to be mentioned in the original contract in order to be invoked. For example, a supplier and customer can agree to suspend certain obligations until lockdown is lifted. This provides relief for both parties, but also keeps the contract open, allowing it to resume once things return to normal.

For supply chain professionals who are unsure of how to make a mutually suitable agreement with their contractual partner, seeking professional advice can help. Avoiding the courts does not mean having to avoid legal guidance, which could lead to an innovative solution for all involved.

Businesses need to think carefully about how they respond to the pandemic. The future of existing contractual relationships will be defined by this period of uncertainty, with a harsh and unsympathetic stance potentially putting an end to contracts. Instead, supply chain professionals should be open to flexibility, seeing negotiation as the answer, rather than court.

 Martin Noble is commercial partner at law firm Shakespeare Martineau

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