Pandemic puts terms of supply contracts under the microscope
Coronavirus has taught us that the customary terms of supply contracts must be carefully reviewed. Routinely concluded contracts can destroy the profitability of a delivery if the prevailing circumstances change radically.
Because of coronavirus, many companies were forced to consider last year whether they could invoke force majeure with regard to their contractual obligations. In the first wave of COVID-19 in spring 2020, situation was open to interpretation and many deliveries were discussed in a tense atmosphere.
A typical condition for meeting the requirements of force majeure is that the obstacle could not be foreseen when the contract was concluded. In supply contracts made during the second wave of coronavirus, this condition could no longer be met, at least in terms of the virus.
“The new waves of coronavirus can no longer be considered to be unexpected. A good question is whether the next pandemic that may come along will be in any way unexpected,” says Ulla von Weissenberg, a partner at Procopé & Hornborg.
Coronavirus, Brexit and other sources of global turmoil have also taught us at a stroke that every clause in a supply contract must be closely assessed, including from the perspective of exceptional events. One surprising event can make a deal unprofitable just because of one contractual term that has been given too little consideration.
During the coronavirus pandemic, for example some freight prices increased considerably. Delivery costs then increased surprisingly if the seller had promised to meet them all in its standard terms and conditions.
In addition to freight costs, coronavirus also brought other challenges. As air traffic reduced and ports became inaccessible, ships sailed without unloading their cargo. Many companies then had to work out their delivery commitments under difficult circumstances.
Even commas important in international contracts
The wording of contracts is important, and especially in international trade, it can be priceless
In commercial contracts, various unexpected situations are usually prepared for with force majeure- and hardship clauses. For example, also the Finnish Sale of Goods Act and the United Nations Convention on Contracts for the International Sale of Goods (CISG) give the seller some possibilities to be exempted from its contractual obligations in the event of force majeure.
However, under foreign law and different legal systems, situations may often be assessed in different ways.
“It is important to assess whether circumstances that may change have been sufficiently taken into account in a contract and how the matter is evaluated under the law that applies to the contract,” says Turo Sumu, an attorney at Procopé & Hornborg.
Companies also increasingly face situations where opposite alternatives are weighted: should they forfeit the deal or try to fulfil the contract in spite of the obstacles? In order to get a deal, it is tempting to promise fast delivery times but, during the Covid pandemic for example, there may be problems in the subcontractor chain and a promise of speed can incur great costs.
When concluding contacts, international contracts in particular, it is vitally important to make use of experts in contract negotiation.
If a dispute arises from a contract, the significance of suitable dispute resolution procedure is also heightened.
“The dispute resolution clause that is often at the end of a contract does not, however, always receive the attention it deserves in contract drafting phase. Dispute resolution in a familiar legal environment, and suitable procedure, bring predictability to any disputes,” says Turo Sumu.
The need to examine standard contracts
“Something that the pandemic has taught us is that routine contracts must be read in a new light,” says Ulla von Weissenberg.
So the three-letter abbreviations like EXW, FCA and CPT are now also worth checking, even though ‘we’ve always been working with these terms’. A contract template that has previously worked well can be a minefield under changing circumstances.
Surprising challenges may arise when goods get stuck in local bureaucracy such as Asian customs. For small companies in particular, settling the matter can cause great difficulties. It is therefore worth considering carefully at which stage liability for the delivery transfers from the supplier to the customer.
Five tips for supply contracts
- Consider carefully what issues might hinder the delivery.
- Assess carefully what delivery terms you can commit to.
- Do not jeopardize the profitability of the deal with over-optimistic contractual terms and conditions.
- Review your routine contract carefully.
- Always use an expert in contractual matters, and particularly in international trade