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BCDR plans

Most material commercial agreements will allow a customer to:

• request a copy of their vendors BCDR plan, and

• require the vendor to regularly test and maintain their plan, and report back on their remediation efforts

Any material commercial agreements that don’t contain such a clause should be renegotiated so that they do include such a clause.

Customers should obtain a copy of their vendors’ BCDR plans where appropriate to assist with their own business continuity planning (eg switching suppliers where necessary etc). Customers should also request regular updates from the vendors about the testing and remediation work that the vendor has done in relation to their BCDR.

It should be noted that the availability of a BCDR plan can have an impact on the ability to access a force majeure remedy (for instance, you may have a plan in place to source product from another supplier etc).

Force majeure clauses

In the current crisis, this is a very hot topic. Force majeure clauses are relatively common in commercial contracts relating to industries like oil and gas that have some experience with catastrophic events. They may not be so common in other industries, for example, aircraft leasing.

Where there is a force majeure clause, a customer will typically want a tightly drawn clause, in order that a vendor can less easily wriggle out of its contractual obligations.

An example force majeure clause for a customer relating to a crisis like COVID-19 may be:

‘Force majeure means any event or sequence of events beyond a party’s reasonable control and, that could not have been reasonably anticipated or avoided, and which prevents it from performing its obligations under this Agreement including, but not limited to:

(a) an act of God, fire, flood, drought, earthquake, windstorm or other natural disaster;

(b) a pandemic;...’

This clause is deliberately drawn very tightly from the point of view of a customer:

• in referring to a crisis like COVID-19, it refers to a ‘pandemic’ (a pandemic is a virus outbreak across at least an entire country, but more likely, the whole world. An epidemic is a virus outbreak over a more localised region. This clause should ideally refer to a pandemic being satisfied when the WHO declares a ‘pandemic’)

• it refers to a party (really, the vendor) being ‘prevented’ from performing its obligations, rather than containing broader wording of ‘hinder or delay’ that the vendor might be able to use to obtain the benefit of the clause

• it doesn’t contain a catch-all clause. Generally, a force majeure provision would contain a ‘catch-all’ clause. The list of events preceding the ‘catch-all’ clause must be tightly drawn. Force majeure clauses are typically strictly interpreted by judges, and the events that they consider might fall in a catch-all clause are usually similar to the list of events that precede a catch-all clause

Force majeure remedies

Careful thought needs to be given to what remedies a vendor is entitled to when a force majeure clause is triggered. A customer may prefer a suspension to a complete termination of the contract. This is a matter to consider when drafting and negotiating a commercial contract.

‘Step in’ rights

These clauses allow a customer to ‘step in’ and take over the running of a project or service that it has contracted to purchase, where the project or service is not meeting adequate standards. Some thought should be given to including these clauses in a contract in relation to an epidemic/pandemic.

BCDR plans

BCDR plans will need to be updated for the lessons learned from the COVID-19 pandemic.

Commercial considerations and bargaining power will drive whether a vendor includes clauses in their commercial contracts that allow a customer to request a vendor’s BCDR plan and whether they can also request that the vendor regularly test their BCDR plan and/or have that plan audited.

Force majeure

A vendor will typically want as broad a force majeure provision as possible. An example clause for a vendor in light of the COVID-19 crisis may be:

‘Force Majeure means any event or sequence of events beyond a party’s reasonable control which prevents it from, or delays it in, performing its obligations under this Agreement including, but not limited to:

(a) an act of God, fire, flood, drought, earthquake, windstorm or other natural disaster;

(b) virus outbreak, epidemic or pandemic;

(c) civil emergency (whether an emergency be declared or not);

(e) any action taken by a government or public authority, including prohibition of entry into a country or region of a country, promulgation of quarantine measures, ordering the “lockdown” of the whole or part of a country…(it may be necessary to go into further detail depending on commercial or industry considerations);

(f)...

(g) a shortage of raw materials, an increase in the price of raw materials, over-commitment, market circumstances or other circumstances that may make the terms of this agreement unattractive to a party;

(h) any other event beyond the reasonable control of the parties.’

The clause is drafted in the widest possible terms:

• it refers to performance of the contract being ‘prevented’, ‘delayed’ or ‘hindered’. This is far wider than simply just stating that performance should be ‘prevented’

• it refers to a ‘virus outbreak’ as well as an epidemic and a pandemic

• it makes reference to ‘civil emergencies’ and ‘governmental action’. If possible, the wording is generally best left broad and general from a vendor’s perspective

• clause (g) even takes into account economic considerations (this may be difficult to negotiate and depends on the commercial considerations and the bargaining strength of the parties)

From a vendor’s point of view, the wider the list of events the better. Not only because it gives the vendor a better chance of satisfying one of these events, but also because a court is likely to take a broader interpretation of the ‘catch-all’ provision.

It may also assist a vendor if it can make the interpretation of its contract subject to the laws of a civil law jurisdiction, such as France, where French civil law automatically implied a force majeure provision into a contract (France is the main jurisdiction where such a term is implied).

Economic hardship clause

As an alternative to clause (g) above, a vendor may instead prefer to negotiate an ‘economic hardship’ clause into its contracts. This provides the vendor with some protection if it is forced into a disadvantageous economic position as a result of a COVID-19-type crisis. This is important because courts in the UK take a strict interpretation to force majeure clauses. They will rarely find a force majeure event based on economic hardship/adverse effects on profitability unless a force majeure clause mentions this (or there is a separate economic hardship clause).

Insurance

A vendor might like to consider whether it can obtain insurance for eg, trade interruption or business discontinuity. However, it should be noted that most commercial insurance policies would specifically exclude disruption in relation to an epidemic or pandemic (it may be possible to obtain such coverage with a much higher premium). Many policies also require direct physical loss.