Use the Force Majeure: What Caused the Clause to be Clawed?
This time last year in the rush to invoke the Force Majeure clause, frantic conversations ensued. But what ultimately caused these prized contracts to be shredded?
In the first part of this blog, we examined that lawyers of all varieties have a common goal. They aim to produce a workable contract between your organisation and your suppliers. When COVID hit, in the ensuing scramble, we first asked, “where are the contracts?” Then, “how do we invoke the Force Majeure clause?”
Contract Lifecycle Management systems (CLMs) were swiftly upgraded from nice-to-haves to must-haves. “Supply wasn’t short, but the ability to get supply through the distribution channel was pretty difficult,” explains Danielle Haugland, Global Alliance Director at Agiloft. The crisis strained good working relationships. Suddenly, everyone needed to know what they were contractually obliged to do.
Contact re Contract
“Nearly every CEO, CFO, CLO woke up at some point in February or March of last year and realised they needed to know exactly what rights and options they had to terminate contracts or cancel obligations pursuant to force majeure,” Danielle says. Getting that information quickly proved painful for many organisations. Indeed, a bulk analysis is somewhat impeded when you don’t even know where the contracts physically are!
But despite their importance, by the end of the year, practically all the contracts were shredded! What caused the clauses to be clawed?
“In many instances, [the contracts] simply fell down,” says Sally Guyer, global CEO of World Commerce and Contracting. “They proved to be pretty vacuous through the course of 2020.” Their research revealed that most contracts sat idly by most of the time. It was the relationships that mattered.
The Terminator
The Force Majeure clause involves termination. “This is a situation where we don’t know whether we’re going to be able to comply with our obligations under the contract,” Sally continues. “Frankly, it was largely irrelevant when what you really want to do is work out how you’re going to work together to come through this uncertain environment.” Despite myriad webinars and seminars on Force Majeure, it was actually not the clause they needed.
Indeed, Danielle found that Force Majeure wasn’t the focus of conversations last year – it was discussing how situations could be navigated within the constraints of the contract.
“Forward-thinking companies are embracing contracting models where it’s not a zero-sum game. So, documenting flexibility and communication and governance protocols … basically, looking for more proactive ways to handle tough situations together, as opposed to termination or other punitive measures.”
For Elyse Blanda, Contract Manager at Valo Health, such conversations reigned supreme owing to one simple expedient: “I’ve never been in my office!” Elyse started her role during lockdown, “so, we really are great about emailing.” In her case, their CLM solved many issues and facilitated vital communication.
As far as this communication is concerned, are contracts an asset or a liability?
Built for the divorce, not the marriage
“We tend to forget about the user in this entire environment,” Sally observes. “We focus on the pre-award, and we get to the contract signature, and everybody celebrates.”
However, Danielle points out that “the true value of contract management is won or lost in the post-award days. This is especially true for procurement.” The whole point of contracting is getting the value of the bargain and defining what happens if that value isn’t achieved. Ironically, managing to that expected value is often overlooked until it’s too late.
“The negotiations are focused on what’s going to happen when everything falls apart as opposed to designing the contract as an operational guide for success,” Danielle continues. “We focus our negotiations on things like limitation of liability; warranties; indemnities: all of these things that are relevant if something goes wrong. And we forget to focus our attention on things like scope and goals: actually developing a shared vision of what it is that we’re going to be doing together.”
“It’s about how you focus effort. It’s about whether or not you’re designing the contract for the people who actually have to deliver against it, as opposed to the judges in the court.”
We the people
“We need to make sure that our contracts are tools of communication,” Danielle stresses. “We need to make sure that there’s a governance structure that helps us to navigate the inevitable uncertainty.”
She also emphasises the importance of leveraging technology to achieve this, but with people in mind: “We need to support the human resource involved in our professional contracting relationships, to enable them again to have that mindset of communication.”
The contract does not equal “relationship,” but it does define the terms of the relationship. In organisations where there may be hundreds of thousands of contracts, little wonder the CLM became a must-have!
Many hands make light work
While the CLM will make life infinitely easier, Elyse points out a fundamental consideration: contracts must be written in language anyone can understand. “I’m not an attorney. We have to remember: a lawyer is not going to be the one who’s usually managing the contract.” This everyday language ameliorates managing contracts anytime, by anyone.
Danielle advocates taking the time to involve all stakeholders when onboarding. “This includes not only Procurement and Legal, but IT, Finance, and any other function that contracts touch. Nothing gets done quickly or well when it’s rushed and siloed.”
This is heartening for Sally. “Contracting is the least-reformed business process in any organisation, typically because it doesn’t have an owner,” she explains. In what was a fragmented process, she now sees member organisations adopting contract design and simplification. “It absolutely speeds up the negotiation process … and it supports much easier navigation of that contract and deliverables in the post-award environment.”
Teflon-coated contracts
As we herald the age of understandable, accessible contracts that encourage communication, the question remains: how “frictionless” are they?
Very, says Elyse, even if it is a lot of work for her. “[A contract] doesn’t have to go to this department, this department and you don’t know where it is. At any given time, I can go into Agiloft and see who’s approved, where does it need to go next, and that’s something I check in very frequently. So I can tell you pretty much where any contract is in a moment’s notice.”
“Another key to frictionless contracts,” says Danielle, “is embedding CLM tech into everyday tools like Word and Outlook.” That way, “users don’t have to learn entirely new systems, and data is transmitted Willy Wonka-style from Word to the system of record, allowing contract administrators to work their magic. Integrations in CLM allow legal finance procurement in sales teams, all silos, to work together, break down some of those walls, and work as a single cohesive unit rather than silo departments.”
Back to the future
Ultimately, contract obligations will be identified automatically. They’ll trigger automated compliance processes to ease post-award phase friction. A great start – but what else can we expect when we think about the contract of the future?
Sally quotes Professor Oliver Goodenough: ‘Asking about the contract of the future is the wrong question.’ She likens it to asking in 1820 what the future of the horse would be. It’s the wrong question. Back then, we should have asked, “what’s the future of the personal transportation device?”
My plea to everybody is not to be constrained by thinking about paper and ink. “We’re working in ecosystems; how do we collaborate across those ecosystems? It requires data flows supported by technology.”
To hear the full conversation about CLMs, frictionless contracts, Force Majeure and the future, register for our exclusive Agiloft webcast.
