Force majeure and delivery issues in outsourcing and it-contracts, practical solutions

The COVID-19 situation is affecting the delivery of outsourcing and IT-services and both suppliers and customers are struggling to establish an overview of where the delivery issues will occur, identify whether the current situation constitutes a force majeure event and evaluate what can be done to overcome the issues. This newsletter will address how contracting parties should discuss and document how to resolve the delivery issues at hand, both in respect of existing contracts, where the situation may constitute a force majeure event, but also in relation to new contracts.

Customers and suppliers must collaborate to avoid deadlock and force majeure situations

How to deal with force majeure situations in practice under existing contracts, very recently entered contracts, and those still under negotiation

As we addressed in our newsletter on 18 March (Outsourcing customers are facing hard choices) force majeure protection under IT- and outsourcing services under Danish law will depend on the interpretation of the specific force majeure clause agreed in each contract.

Even though a force majeure clause is agreed in a contract and it designates “epidemics” or “governmental regulations” as force majeure situation, most force majeure provisions will set out more requirements that must be fulfilled before a party’s non-performance is excused by force majeure.

Such additional requirements may require a party to give “prompt notification” and to“use all reasonable endeavours to limit the effect of the delay or non-performance”. Even if force majeure is deemed to exist under these requirements, for some or all of the services this may be followed by further requirement to agree “on procedures for such continuation or resumption of performance that under the circumstances is reasonably possible”.

Most suppliers will therefore experience issues both proving that a force majeure event has occurred and ensuring they have complied with the relevant requirements. Most suppliers will try to mitigate and manage any delivery issues as best they can before calling force majeure, not only due to their contractual obligations but also to keep themselves in business and to avoid damaging their relationships with their customers. Offshore providers arranging to work remotely from home is one real and practical example of how suppliers are trying to mitigate the potential issues associated with COVID-19 in the BPO and ADAM spheres. Furthermore, where the outsourced services are crucial for a customer’s business, the customer will often be more interested in collaborating with the supplier to find a practical solution than insisting on strict contractual performance.

Generally, there are good reasons for both parties to collaborate to limit any non-performance issues rather than waiting for the issue to become a legal dispute.

When faced with circumstances which may amount to force majeure, the first thing to do is a risk assessment:

• Will the supplier be able to perform in accordance with the contract?
• How may the supplier’s supply chain be affected?
• Is there any way to mitigate the effects?
• How may the customer be affected and what can the customer do?

Having assessed the concrete circumstances, one can turn to the contract to identify:

• Which business continuity plans are in place under the contract?
• Should customer (or supplier) call a “disaster” under the BCP regime?
• Will current circumstances qualify for force majeure?
• If the supplier can partly perform the services, is there a breach and should notification of breach be given to preserve rights?
• Is step-in under step-in rights in a contract an option?

Practical solutions for existing contracts

It is important to note that the situation will change over time, meaning what was not force majeure last week may be force majeure this week (and vice versa). Therefore, the customer should track and evaluate the delivery situation continuously in cooperation with the supplier. This should not be tracked for the overall situation only, but for each service element and deliverable under the contract. Furthermore, under most force majeure clause it is strict requirement that the supplier notifies the customer as soon as they become aware of such circumstances. So far, in practice we have seen very few suppliers calling force majeure.

When the customer has an overview of the issues at hand from the supplier, the parties should together investigate to what extent:

• non-critical deliverables can be postponed e.g. if a hardware or software update was agreed to take place, it may be possible to postpone;
• non-critical services can be reduced or even closed down, e.g. if some services are not in use, due to the customer’s employees working from home or due to the customer having to close down or reduce parts of its business;
• services can be supported or co-supported by customer in some areas where customer still have employees with the relevant knowledge or is capable of hiring in consultants with such knowledge;
• critical services or deliverables can be provided from other supplier countries or from other  locations than otherwise agreed, and the move of this responsibility can be done with less restrictions than otherwise set out in the contract;
• services can be optimised or automated with new tools/software;
• it is possible for the supplier to find new subcontractors, not affected in the same way or with different technology to support or take over some services;
• service levels can be reduced or suspended;
• work remotely from the homes of employees of the vendor may be set up; and
• invoicing and payments can be changed, e.g. higher payment to include a new subcontractor and of course lower payments for less services (this is often set out directly in the force majeure clause), or a right for the supplier to invoice more often than originally agreed to provide cash flow to the supplier’s organisation.

All of the above may affect the security of the services, breach GDPR requirements or introduce other risks, including the risk of service levels not being performed in accordance with the contract. For each decision the customer makes, it must be assessed:

1. whether it is legal to change the services or postpone deliverables e.g. reduction of security levels cannot deviate from GDPR and sector specific legislation; and
2. for how long the customer’s business will be able to accept such reduction or change in the services or payments etc.

All solutions agreed between the parties must be documented in temporary amendments to the contract or a change note for changes of an operational character, with the possibility to prolong and change as and when the situation changes. In the event a party acknowledges that a force majeure event exists for some or all services the agreed amendments or change note may constitute:  “procedures for such continuation or resumption of performance that under the circumstances is reasonably possible”,  if such a requirement is included in the force majeure clause.

It is important to note that a force majeure event only suspends the contractual obligations that are affected by the event, and the burden of proof is on the supplier to demonstrate the force majeure event has occurred and the services have been affected.

In the event the customer is not convinced that the supplier is in a force majeure situation it should be set out that the amendments do not constitute an acceptance of force majeure and all rights are reserved on the customer’s part. As a reaction to this approach by a customer, the supplier may require that the amendment state that the supplier maintains that the circumstances constitute force majeure and if such circumstances should later be deemed to exist, the supplier may claim expenses and losses for any assistance provided.

Rather than going into detailed legal discussions, the parties should consider simply reserving their rights and focus on collaborating to secure continuity of services in the best possible manner and take such steps required to remain compliant with regulatory requirements. When doing so, parties should be aware of utilising those contractual solutions and guidelines that may be applicable in the current circumstances. For example, if a contract has a step-in rights mechanism, the practical solution to the situation at hand may be for the customer to take over some of the services and lead supplier resources.

New contracts – no force majeure?

Contracts that are currently being negotiated or that have been signed within the last weeks may have a force majeure clause. However, a party is unlikely to seek force majeure protection as the Covid-19 pandemic and the consequences may not have been “unforeseeable”.

In the event the contract are currently under negotiation and the COVID-19 situation is expected to have effect on deliveries, time schedules, pricing etc. the parties may consider the following options:

• Pause the negotiations and await the normalization of the situation;
• Finalize negotiations but postpone signing and startup till the situation has normalized;
• Finalize the negotiations but postpone signing, however, startup deliveries under a letter of intent with an interim set up, including interim pricing and a possibility to terminate for convenience;
• Finalize negotiations and sign, however, agree a COVID-19 protocol that set out how the situation will be handled until normalization, including escalation procedures and extended obligations on cooperation. The commercial handling under such a protocol could be e.g.:
• To agree clauses that allows the customer to defer some specific services till a later stage, e.g. by prolonging the contract in the end, so the supplier will effectively have delivered for the period of time agreed in the first place;
• To agree specific relief events or limited liability for the supplier on some services which are more at risk to be affected by the situation;
• To agree additional payment for some services being delivered on-shore.

The choices depend on the situation for both the customer and supplier, and even though it may at first glance appear best to pause and wait for the situation to normalize, this may not be the best commercial outcome. Some contracts are crucial for the customer’s business and should not be put on hold.