It’s crisis time: How to assess your contractual obligations
As COVID-19 plays out, corporate counsel must move fast and focus first on their material contracts. Here's how to do it strategically.
As reality settles in, everyone is assessing the impact of COVID-19 on their contractual obligations. And the same questions keep coming up. “Can we claim force majeure?” “Are there any other rights or remedies that we have in light of this unprecedented event?” To make the most of the exercise, it’s crucial to take a step back and consider the risks you need to manage.
Ask yourself: What is a priority right now? And then focus five simple steps on carrying out a strategic assessment of your contractual obligations:
Understand what constitutes a “material contract”
Start by looking at the obvious: critical suppliers, major clients and essential staff. Then move to your key stakeholders – your investors, lenders and landlords. Finally, you’ll need to assess essential operations (IT systems, energy supply). In doing so:
- Focus on what is essential to the survival of your organization.
- Make sure to engage with other functions and different levels of your organization to get a better picture.
- It doesn’t have to be pretty or perfect. But be clear about what goes on the “watch list."
Get a list of all material contracts
Yes, it can be daunting if you don’t have a centralized contract management system, or if your organization has a long list pf past acquisitions, or if you operate in a very decentralized way.
A word of caution: Looking for a new technological solution might be tempting, but it’s probably the wrong answer right now. Successful implementation takes time and money, and right now, your resources are scarce, people are anxious, and cashflow is vital. Taken together, it’s all pointing towards a “Bad Idea Right Now” stop sign.
Here are your two best practical options: leverage tools that your team is already familiar or rely on the experience of service providers:
- Inside job: The “harvesting” of material contracts could be done by creating a “Material Contract” folder on a shared drive. Ask anyone to “dump” the information in the folder, and have an administrative person review the content and create an Excel sheet as a simple database.
- Outsourcing option: If the Inside Job option isn’t realistic, turn your attention to alternative legal service providers.They have tech and processes, and their people know how to implement various legal tech solutions.They’re experienced at remote working, in full operation mode and ready to help.
Determine how COVID-19 is impacting your organization
Now that you have a better sense of which contracts matter, you need to plan the scope of your review. You don’t have the luxury to worry about every risk. Focus on how the crisis is impacting your organization and your key stakeholders – right here and now.
And remember, perfection is the enemy of progress.
Don’t overthink things and don’t look too far ahead. The business landscape is evolving every day. Deal with what you know at this time and reassess often.
And break things down. The risks you need to manage are considerably different, depending on these three scenarios:
- Your essential services: Ramp up your operations. Ensure critical supplies. Deal with the unprecedented increases in demand while managing health and safety risks for your staff.
- Your non-essential services that can still keep going: Maintain operations while implementing new remote work strategies and trying to manage cashflow and credit risk (clients who can’t pay).
- Your non-essential services that have to shut down: Assessing how to support your staff.Ensure an eventual resumption of operations. Avoiding defaulting under your agreements, or even bankruptcy.
None of this can be done in silos. Involve different business units and stakeholders and make sure you’ve spoken to all concerned.
To get you started, consider some of the following challenges: An inability to operate, to access your facilities, to get critical supplies, to deliver or get delivery on time; triggering a default under your financial agreements because of “material adverse effect” clause; clients who can’t pay; clients who can’t receive your services or products; clients who want to terminate their contracts, or are going out of business.
By now, you should have your current Contract Review Guidelines based on the various types of material contracts and risks (type, impact, likelihood) you need to consider. Be clear on what will be in or out of scope of your review for this round. Keep that scope tight. You can always go back and broaden it later.
Implement your plan
Use whatever project management tool you are the most familiar with. Again, forget about learning a new “way of doing” things:
- Organize your review team and assign clear responsibilities.
- Set up timelines.
- Agree on how the findings should be organized.
- Map your step-by-step review workflow using your Contract Review Guidelines makes a big difference in result consistency and your ability to scale up or down.
- Decide on the results review process: who should be there, when to do it, and who can make decisions.
- Capture your next steps and schedule your next review.
Continue to monitor and consistently reassess
As the situation continues to evolve, you might come to consider other risks, and need to identify additional contracts as “material.” Dig a bit deeper below the top layer of “materiality,” or explore potential opportunities in light of those evolving circumstances. Then re-run steps 1 to 5 whenever you can.
A parting note…. When facing change and uncertainty, we all run back towards our natural personality traits. As we’ve been reminded by Dr. Larry Richards, lawyers tend to score high in skepticism and low on sociability. The good news is that we also score high on urgency, which is quite useful right now!
So, use your heightened sense of immediacy and result-oriented personality. Engage with your colleagues, and have faith in the process. All will be well.