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  1. Renegotiating long-term contracts

Beyond the pandemic: rethinking the supply chain

Renegotiating long-term contracts

One of the major benefits of long-term contracts is the certainty they offer the parties: the seller has a predictable revenue stream for the foreseeable future while the buyer has more control over costs. But if there is a major change in circumstances, long-term contracts can leave a party in an arrangement that is no longer commercially viable.

The supply-chain strains resulting from the pandemic are a case in point, with many companies finding themselves unable to fulfil their contractual obligations due to national lockdowns, border closures and other government-imposed restrictions.

While some businesses have been able to renegotiate contracts or reach agreement on deferring performance and/or payment, many others have been unable to resolve amicably the disputes arising from the consequences of COVID-19.

This is leading to disputes revolving around questions of force majeure/frustration and material adverse change (MAC) provisions, or similar legal doctrines that may excuse performance.

Without careful handling, contractual renegotiations can end up in costly formal proceedings. So what are the stages of contract renegotiation, how should you manage the process and what constraints might you face? 

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Changing long-term contracts: from informal renegotiation to litigation

01

Informal renegotiation

More junior staff in, for example, the procurement, warehousing or shipping department ‘informally’ renegotiate supply schedules, volumes, etc with their counterparts

The supply issues may be resolved amicably without the need for escalation.

02

Escalation

More senior staff, eg department managers and the legal team, formally renegotiate with the counterparty.

Requires full examination of the contractual wording to determine who owes what to whom.

03

Litigation/
arbitration

A last resort for when negotiations fail or a party refuses to renegotiate.

Some courts/tribunals only look at the words on the page; others may try to uncover how/why the contract was first agreed upon.

Renegotiation checklist

  • Make sure relevant staff are made aware (eg via training) when and how a contract-renegotiation process might arise – they need to avoid casual remarks that could be interpreted as making concessions to your counterparty.
  • Document as much as possible – what was recorded during the opening skirmishes can really help during the formal renegotiation process (and any litigation/arbitration). It may be that the counterparty had agreed to waive one of their rights or made a concession that can bolster your case.
  • Check your choice-of-law provisions – the contract may state that the law of a particular jurisdiction applies. However, with multiple contracts, the jurisdiction may differ, offering you a choice you can use to your advantage.
  • Be aware of differences in legal concepts, principles and norms across jurisdictions­ – while taken as a given in one jurisdiction, they may not be acceptable in others.
  • Be aware of cultural differences – certain negotiating tactics may not be effective with counterparties based in other parts of the world.

If you find that your long-term contract renegotiations are not going to plan, a member of our team is on hand to help.

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