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Coronavirus and Force Majeure


At the time of the Global Financial Crisis, the Force Majeure clause briefly rose to second place in the annual study of the most negotiated terms. Those buyers and suppliers who had sufficient power to drive changes sought to reshape the clause in ways that would work to their advantage.

Now, the outbreak of the Coronavirus and its fast-emerging impact on world trade has once again elevated the importance of Force Majeure clauses and many are asking how it will impact obligations of contract performance.

Finding the contract

It is at times like this that many organizations wish that they had better control and insight into their contracts. In order to establish the likely impact of this health emergency, they firstly need to be able to find their contracts and secondly they need to analyze what they say. A fortunate few will have robust and searchable repositories and have also deployed the sort of AI or NLP tools that support rapid analysis and review of the relevant terms.

But beyond this, is the nature of the emergency now declared by the World Health Organization likely to qualify as a Force Majeure event? In order to qualify as a public health emergency, it must (i) be extraordinary; (ii) constitute a public health risk to other States through the international spread of disease; and (iii) potentially require a coordinated international response. These factors clearly indicate the seriousness of the event, but in themselves do not of course generate the basis for a claim of Force Majeure.

Determination of applicability will always depend on the specifics of the clause and how it is written. But there are other factors to be taken into account in any adjudication relating to the applicability of Force Majeure. Among the critical factors are likely to be industry custom, whether or not the event in question was unforeseeable, and whether adequate efforts have been made to mitigate the consequences.

Further considerations  

Thoughts on this topic do not simply end with the question of whether Force Majeure applies (and in many cases I suspect it will). There are also factors such as termination rights to be considered, This will most likely depend on the duration of the event – so right now, not something we can forecast.

There are also likely to be related terms to consider. For example, if Force Majeure applies, what consequence does it have on things such as an extension of time, or future obligations on supply, or possible recovery of additional costs. Also, are losses in any way recoverable under insurance?

Finally, what about a situation where there is no Force Majeure clause – does this mean an obligation to perform? the answer is not necessarily, because the concept of ‘frustration’ may apply.

 

Do Procurement practices cause dishonesty?


To survive, suppliers must win bids and make money. Customers appreciate this point – most of them are supply organizations themselves. But how much money should suppliers make and how should they make it? That’s where disagreements start to arise and where the potential for contention begins.

While modern procurement acknowledges the need for profit, it is the primary function charged with achieving cost reduction. It isn’t easy to find the right balance so, in competitive markets, it is tempting to base supplier selection on the lowest price. In order to make things even simpler, the methods behind strategic sourcing sought to limit the impact of long term relationships (where loyalty or friendships might influence decisions) and to deconstruct acquisitions into component parts so that they could be ‘commoditized’.

In principle, all of these steps made sense, especially in an era when global markets and constant innovation were creating a fast-changing competitive landscape. They allowed massive simplification and large-scale automation of procurement decisions. Many supply relationships became arm’s length and ‘success’ was measured on a combination of negotiated savings and compliance with bid and contract terms.

In other words, concepts of value, reliability and broader business judgment were largely eliminated by these new scientific and objective methods. And it is certainly the case that input prices in general fell.

But it’s all different now …

At this point, there are many who will say that the environment I describe is a thing of the past, that today Procurement has a renewed focus on performance and outcomes, a spirit of collaboration and relationship management. And I have no doubt that this is sometimes true, but I also know that many of those who believe in such change frequently find themselves swimming against the tide of traditional thinking and embedded systems.

i say this based on numerous factors, and will cite two of them;

  1. the experience of suppliers. I talk with suppliers every working day. In general, their experiences have not changed. Procurement decisions continue to be driven by the same measurements and procurement professionals are not open to exploring broader sources of value, or to examine the potentially negative impacts of rigid compliance.
  2. recent IACCM research (December 2019) shows that approximately 70% of negotiations today are virtual – the parties never meet. Even worse, a high proportion of those negotiations are undertaken through email – hardly conducive to deep and meaningful conversation, or examination of ideas or success criteria.

What is the impact?

In a previous blog, I highlighted the issue of supplier honesty – in particular the frequent disconnect between the claims made by Sales and Marketing and the limitations expressed in the contract. This is clearly contrary to society’s growing demand for openness and transparency and many of those commenting on my blog decried the continuing dishonesty of suppliers.

But several made the valid point that ‘As a supplier, if we are honest, we lose the bid’. And I have many examples where that is true. So those in sales contracting and commercial management who espouse honest dealings are quickly shut down by their experience in the market. Of course this does not excuse deliberate misrepresentation or lying. I am talking here about having open conversation about risks and uncertainties, factors that could derail the desired result or outcome. and which can be effectively addressed or avoided only if they are discussed up-front.

Cooperation, collaboration, honesty – none of these is a unilateral activity. It requires change by both (or all) parties. Since they are the ones who control the purse strings, it is Procurement who have the power to drive this change. Without it, we have to accept a lack of transparency and with it, a continuation of sub-optimal results and the loss of both economic and social value.

Contract redesign is great – but it needs conventions


Contract redesign is an exciting and massively beneficial movement. Digitization has enabled new thinking in both the form and the purpose of contracts. We have entered an era where trading relationships are not just proliferating, but also need to be adaptive to shifting values, volatile markets and constant innovation. To support these demanding conditions, contracts are assuming a new and dynamic role, facilitating understanding and performance – which means design for users and clarity of communication.

These are not the attributes associated with traditional contracts and their related documents which, with few exceptions, are designed by lawyers, for lawyers. In the background, obscure structures and terminology are justified by the overhanging threat of litigation and legal precedent. In reality, a tiny fraction of contracts are litigated and there is no evidence to support the contention that judges cannot cope with documents designed to provide clarity. Indeed, it is the very lack of clarity that contributes to disagreement and dispute.

Momentum for change is rapidly increasing as businesses and governments start to recognize the massive savings and performance improvements to be achieved through redesign of contracts as a driver for digital services.

User-design AND usability

However, in shifting to a new and different form, it is essential that we do not overlook the core purpose of contracts and their need to interface with not only people, but also systems. A contract is not a work of art and we run the risk that we replace the artisanal approach of legal drafting with an equally artisanal approach of innovative design. Contracts have a practical purpose in defining and driving performance and to do this in a practical, affordable way depends on data interoperability.

To give an example, emojis and pictorial representations certainly make contracts more user-friendly. But in the business world, if my use of emojis or pictures is not the same as yours, I have simply created confusion and probable misunderstanding. In this example, I have replaced standardized legal convention (which is at least understandable among those with legal training, even if obscure to others) with a non-conventional approach that is subject to misinterpretation by everyone. At an extreme, it is rather like everyone inventing their own language and then becoming frustrated because no one else can understand them!

The process of exchange

Contracts do not operate in isolation. They are one component in an exchange process and must assist in making exchanges more reliable. This means that there is a need for conventions and avoiding a situation where the exciting prospects of redesign become an artistic free-for-all. That is why IACCM has invested heavily in building a contract design library that is in large part free to access and which welcomes continued contribution of new ideas and proposed conventions. And it is also why technology firms are steadily adopting a set of standardized conventions within their software that will support the expression and performance of contracts.

I would like to acknowledge the contribution of Professor Oliver Goodenough, who identified the importance of developing ‘conventions’, rather than potentially more rigid ‘standards’.

Are you doing what your CEO needs?


Disruption. Apparently that is the number one issue facing CEOs. But what does it mean – both for them and for you?

The challenge for a business leader today goes far deeper than just the nature of competition, the speed of change or the need for agility. Those are symptoms of a much greater challenge of control – of having the time and the data to make good decisions.

So what has changed?

The Economist (Feb 8th, 2020) makes reference to this issue of disruption and provides an excellent outline of what it means in an article ‘Meet the new boss’. Encouragingly, the message it offers is essentially the same as that which IACCM has delivered to its members for several years – the need to adjust to intangibles (for example, services rather than products), to tackle fragmented data flows, to develop stronger and more collaborative inter-organizational relationships and to pay greater attention to social impact and alternative measures of value.

These are demanding changes, but they are precisely what high-performing commercial and contract management is about. Grasping the commercial impact of a shift from products to services; designing technology platforms that capture and disseminate commercial data without a need to replace existing application architecture; changing measurement systems and performance management to drive the right commercial behaviors; rethinking market relationships and selection criteria to demonstrate ethical standards and values.

Preventism has had its day

Last year, IACCM research showed that most contract and commercial practitioners see their role as ‘preventist’ – that is, preventing bad things from happening. While that’s important, it isn’t enough. And indeed, if we are not focused on the key issues highlighted above, we will rapidly become of marginal importance. Already, many in the commercial community complain that they aren’t sufficiently valued. It’s time to wake up and start focusing on the things that business leaders really care about. ‘Preventism’ is inevitably focused on the past, about not repeating mistakes or omissions. CEOs need people who equip them for today and the future, who focus on delivering success.

Recent IACCM research and tools supporting these changes include work on servitization, relational contracting and economics, uncertainty management, impacts of new technology and relationship resource planning (RRP). They are all focus topics at the 2020 IACCM conference series – see dates and details at www.iaccm.com/events

 

 

 

Honesty in Contracting


Conventional wisdom is that Sales and Marketing should extol the benefits of a product or service and avoid mention of any possible drawbacks or negatives. Those aspects are covered by the contract, typically in the form of limitations with regard to performance or use, but also in terms of potential recourse. In other words, we all know that sales people and marketing materials tell only part of the story and the contract often conveys a very different message.

Is this approach actually smart or effective? Especially in today’s environment of increased openness, would more overt honesty and transparency be a much better policy? It seems obvious that this might at least lead to higher levels of trust and might reduce the amount of time spent on negotiation, but at what cost? For example, does complete honesty deter potential buyers or cause them to switch to a less transparent competitor?

Recent research published in the Harvard Business School working  papers suggests that Sales and Marketing may have got it all wrong and that honesty has multiple benefits – more business, faster business and greater customer loyalty. The paper describes large-scale experiments where a business set out the benefits of their product or service, but also explained the limits or trade-offs. This meant that potential customers were much better informed in making their decision and no longer had to scour the small print in a contract to understand the offering or its limits.

How far can this extend? Right now, the research appears only to relate to consumer and small business markets, but might there be similar benefits in larger scale business-to-business contracts? Recent IACCM research into ‘as-a-Service’ contracting certainly suggests that there could be. IACCM discovered that offerings such as Cloud computing suffer significant delays in adoption due to a lack of clear understanding and unrealistic customer expectations. The advantages of lower prices, greater flexibility and reduced investment require customers to accept some loss of control and very little flexibility in negotiating terms. Perhaps explaining these trade-offs in the initial sales materials would similarly result in faster and better informed decisions as well as greater respect and trust in a supplier’s integrity.

McKinsey and collaboration: better late than never


McKinsey, the strategic consultant and advisory firm, has discovered collaboration. At least, they have discovered collaborative contracting – I don’t know whether that translates to McKinsey itself collaborating with anyone!

While welcoming this ‘discovery’, which is outlined in two recent articles. I would be even more enthused if McKinsey drew on – and perhaps contributed to – the extensive body of existing knowledge and experience in this complicated field. Collaborative contracting is not new. There is a wealth of data on causes both of success and failure. It is implementation that is challenging.

‘Collaboration’ takes many forms (a point that McKinsey acknowledge) and it is therefore perhaps an unhelpful term. After all, why would any organization set out to be deliberately non- collaborative with its customers or suppliers? The point is more about working out the degree of collaboration required and how this will be supported through an appropriately structured relationship. Organizations struggle to build collaborative frameworks because internal systems, data flows and performance measures typically stand in the way.

Data shows that many workers find it more difficult to build collaboration internally than externally. Certainly when it comes to contracting, the diversity of those involved creates real complexity. Without a more holistic approach to the lifecycle of contracts and relationships, it is unlikely that external collaboration will occur on anything other than an exceptional basis.

The good news is that market forces seem likely to change this by forcing a reappraisal of how value is created and delivered. The new mantra of ‘purpose and profit’ will only be achieved through fresh attitudes and behavior. New technologies will play a massive role by simplifying data flows and communications. Transparency is foundational in collaborative relationships and, until now, has been extremely difficult to achieve at scale.

Hence the key point is not that increased collaboration delivers benefit. That has been understood for years. What matters is how to achieve it as an innate and sustainable capability – and this is the question that serious researchers such as IACCM, Kate Vitasek and others have been exploring. Recent work has focused on how to better analyze the type and depth of relationship needed, thereby ensuring an appropriate commercial model and contract terms. We are past the point where proof of concept is needed. It’s time to operationalize.

Social value on the rise: volunteers needed!


As social expectations grow, organizations are increasingly focused on defining ‘purpose’. This was a major theme at the 2019 World Economic Forum and momentum has continued, most notably with the recognition by 181 top CEOs that ‘business needs a purpose beyond profit‘.

The challenge with developing purpose is in part how it is defined, but even more how it is then measured. The social value movement is clearly a major contributor to this realization of purpose. As a concept it considerably pre-dates the awakening of the CEO community, but the last year has seen a surge in interest.

Contract for Change

I am delighted to be leading a working group within an overall initiative that’s operating under the banner ‘Contract for Change’. The purpose of the initiative is to bring social value to life, to develop guidance and methods that make it real. My contribution is to gather data and insights from around the world on how different countries and regions are defining and implementing social value, in particular within public sector procurement. But my interest extends also to private sector initiatives since we know from IACCM members that there has been substantial progress in tackling environmental, social and governance issues.  Late last year, I also gained some exposure to the field of Relational Economics, where academics are exploring ways to capture and measure intangible value.

Overall, this is a truly exciting field because it offers the prospect of the sort of innovative thinking that will drive the changes we need to address sustainability, inequality and social cohesion.  It is core to the mission of IACCM and its members – and we are in many ways uniquely positioned to drive this agenda forward.  But the overall ‘Contract for Change’ initiative needs volunteers, willing to contribute to its various working groups. Equally, my particular working group needs people who are willing to explore direction and progress within their specific country or industry. If you are interested in being part of this important movement, please let me know!