Managing Contract Compliance During the Crisis

Companies are suddenly faced with the possibility that customers, vendors and partners won’t fulfill contractual obligations due to circumstances beyond their control — the now-familiar force majeure provision. Knowing what force majeure permits, who can invoke it and when it applies is of utmost importance when a disaster like the coronavirus strikes.

Legal and compliance teams are racing to see what exposure their organization has during this black-swan event and what the contract fallout may be. That’s easier said than done. All too often, they can’t readily access detailed information on their agreements. In many cases, those documents are stored as scanned PDFs, which cannot be searched in locked image format. Manually searching through all your organization’s contracts for every problematic clause would be a tedious, time-consuming, mistake-prone process under the best of circumstances.

During a crisis like this one, when time is pressing and your staff may be working remotely or reduced by layoffs or furloughs, the task can seem impossible. It’s urgent, however, as the future of your company could be at risk. The consequences of the pandemic may be more far-reaching than you’ve imagined. If your revenue stream dries up, a supplier stops manufacturing a part you need to make your product or a shipping company ceases deliveries, there could be a devastating ripple effect on your business. Or let’s say you use a data center that has reduced its staff to the point that it can no longer provide the level of service necessary to protect your data at all costs. There may be second-order or third-order impacts we haven’t even thought of.

To put out these and countless other fires, you have to be able to identify the issues — and quickly. Access to data is essential, because it’s all about the minutiae. The specific language you’ve agreed to determines your responsibilities and your rights. That’s where technology can help. Getting all your executed contracts centralized in one database is the first step. If you haven’t already, now is a great time to modernize your legal document storage. If you’re storing contracts on an on-premise shared network drive, accessing them can be difficult if you’re now working from home. VPNs are cumbersome and connection bandwidth can be a limiting factor. A cloud-based solution is a necessity for a modern compliance professional. And lastly, digitizing PDFs so they are fully searchable and downloadable will enable you to delve into the details.

One of the first things you need to check for is force majeure. Depending on the exact wording in your contracts, parties owing you money, services or goods may not have to supply them, either temporarily or permanently, which can cut off your cash flow and disrupt your operations. Clearly, it’s critical to get a handle on that so you can take appropriate steps. On the other hand, you may also be able to avoid making payments or providing services during this crisis if the language in your contracts offers you any protection.

There are other issues that need immediate attention, including the right to terminate contracts. Some partners may take this opportunity to end their agreements if the termination clause in yours is written broadly to permit cancellations under any condition. That’s another fire you want to put out as quickly as possible.

Modern artificial intelligence (AI) solutions can help you deal with these issues by empowering you to take control of your contracts. AI contract-analysis solutions can analyze your documents at lightning speed, parsing, categorizing and identifying problematic areas. Armed with that information, you can calculate risk profile and identify contracts that need to be budgeted for or renegotiated now, before a potential financial disaster becomes reality. By automating these processes, AI is one method helping in-house legal teams to protect their companies, understanding and mitigating risks and liabilities in minutes rather than months.

It also lays the groundwork to prevent future issues, automatically providing key insights with deep search, custom reporting and analytics. You’ll be able to keep your eye on specific contract language in case you have to make changes across the board.

The current pandemic is likely to be a triggering event that prompts businesses to take contract management much more seriously. In the time to come, I expect compliance pros to do things differently, to take force majeure more seriously. This could become a negotiating point when striking new agreements, and those who are unprepared could encounter delays or even lose deals.

Here are some practical pointers to help you prepare for the challenges we’re facing now and in the future:

• Ensure all contracts have explicit termination clauses with detailed provisions that allow cancellation only under specific circumstances, not at will, simply for convenience. Besides specifying the conditions under which termination is allowed, require minimum notice (anywhere from 30 to 365 days) with prorated fees for ending mid-term. Avoid contracts that require refunds to be issued for terminated contracts where you are on the hook to send out payments.
• Pay close attention to data privacy and GDPR and CCPA compliance, which will continue to be major concerns that warrant close scrutiny.
• Rethink payment terms. When it comes to customer contracts, stay flexible by giving away the 90-day payment for upfront annual fees, or offer options like quarterly or semi-annual payments to help win new business and retain existing customers. For vendor contracts, try to pay monthly where possible in order to conserve your company’s cash during these times of uncertainty. For systems critical to your business, ask your vendors if they will renegotiate the price if there are features inside a product you aren’t using. For products that aren’t so critical, reconsider whether you even need them, and if they’re coming up for renewal, ask the business unit owner of the product about its usage and the workflows dependent upon it. You’re in the driver’s seat, and your priorities are to take care of your customers and enable your revenue engine.
• For partnership agreements, spell out explicit details for calculating revenue shares, service credits and price breaks so there are no gray areas when it comes to payouts and fiduciary promises. Include exact payment dates, rather than simply saying payments should be made quarterly, and list minimum payment amounts.

Such actions may seem like overkill, but after going through this, nobody can possibly think vaguely or loosely worded contracts are acceptable. Nor can they remain unfamiliar with every detail in their contracts. You need to structure your agreements carefully and understand what rights and obligations you have under different scenarios. It’s important not only for your organization, but also for your professional future. An experience like this will affect the compliance and legal professions for years to come. Potential employers will want to know what you did during the crisis, how you supported and protected your business and what kind of battle plan you implemented.

Companies that didn’t think they needed a software solution last year are realizing they do, in fact, need tools to help them manage their contracts effectively. The timing may not be right to make a purchase now, while facing many financial challenges. But even if you’re not in a position to implement such a solution today, you can prepare for the next stage and have a plan ready to execute when circumstances permit.

Looking ahead, we expect more companies to see the importance of data and to be willing to invest in it. They’ll want to be able to put out fires very quickly when the need arises. Those that invest in data to drive decisions will have more power in the post-COVID world than those who don’t. And that could mean the difference between companies that thrive and those that don’t survive.