Contract Data Credit: Shutterstock.com.

 

Over the past 10 weeks, there has been more talk and attention on force majeure than most lawyers have experienced since law school. This almost omnipresent clause in contracts is usually just buried in boilerplates. We are not saying the current attention isn't warranted, but there are many other contract risks tied to the COVID-19 pandemic deserving of consideration, as the nation and the world adjust to the "new normal." These contract risks will also impact the contracting process for years to come. Organizations need to rethink their approach.

First, current contracts should be reviewed and analyzed to determine what conditions need to be met before the performance requirements can be changed. Can the timing be changed? Can the duties be adjusted due to the current conditions? This is often covered in the force majeure provisions but can be governed by other clauses in the agreement. It is important to know that.

Contracts may also need to be reviewed to better understand the costs incurred if the contract is to be terminated and to better understand the potential litigation risks that may arise if you do so. What are the limits on liability? Is there an indemnification clause? Are there notice requirements? Most contracts will include language around how disputes may be resolved as well as the governing law.  These all need to be weighed to understand the potential risk when canceling or terminating an agreement or, as a last resort, employing an efficient breach.

Optimized Contract Management Process

To ensure the contracts are properly analyzed and reviewed, the process must be thorough and accurate and the resulting data should be presented in an intelligible and actionable format. Consider the following areas:

Scoping, Collection and Chase: The first step in contract review is collecting all the target contracts. If the organization does not have them centrally located in a repository or contract lifecycle management (CLM) solution, then a discovery effort may be necessary to find and collect them. An important sub-step would be a scoping exercise to determine which contracts are active and relevant. It is also critical to ensure your efforts sweep up all related papers to the relevant contracts (e.g., amendments, exhibits or others). Creating family structures between and among the contracts is necessary to understand the potential effect each contract and its provisions have on another.

Review and Extraction: The second step is to perform a review and information extraction exercise against the target contracts.  Depending on the volume and complexity of the contracts, a CLM software may be employed for this review.  Artificial intelligence (AI), machine learning and language-based analytics are terms used to describe the software that attempts to automatically review and extract information from contract documents.  There are many solutions in the market with a wide range of capabilities and effectiveness. Even with the best AI solutions in the market, a second pass human review is often required to gain a more complete and accurate view of the contract level and contract family level.

Negotiation: The third step is analyzing the results of the review to determine your legal and business options and then make decisions on the course of action for each contract.

After reviewing the data, organizations should prioritize their contracts by their importance to the business—the potential risk presented, the identification of contracts most likely to fail, and the resulting impact on the business, should they do so. At this point, the proper remediation can be determined. Depending on the volume of contracts and the nature of the decisions, a CLM solution could aid in executing mass amendments and/or termination transactions.

Adapting to New Risks and Challenges

Going forward, a good contract lifecycle process should ensure updated force majeure clauses, which anticipate labor and supply chain challenges related to diseases, illnesses or pandemics, are included in the contract templates. Also, where practicable, current contracts are amended with the updated clause. Organizations may want to pay special attention to termination provisions, disputes resolution clauses, notice requirements and insurance requirements. At a basic level, the above exercise is generally good business practice simply for the sake of having the agreement handy for when it is needed.

This may all seem daunting; however, proper AI-enabled technology, a proven process, and the right expertise will help one handle not only COVID-19 but also any other crisis that may arise in the future.

 

Tyler Marion is a managing director in the Legal Management Consulting practice at Duff & Phelps. Tyler brings more than 13 years of combined practice and legal operational experience, and has particular expertise in contract management, mergers and acquisitions, and legal operational consulting.

Michael Stevens is a managing director in the Legal Management Consulting practice at Duff & Phelps, and has more than 26 years of experience providing operational and technology consulting services to leading corporations and law firms. His experience lies in the areas of contract management, matter management/eBilling, intellectual property management, document management, and operational and business process improvements.

Rich Vestuto is a managing director in the Legal Management Consulting practice at Duff & Phelps. He leads the firm's information governance, records and contract management capabilities, leveraging his over 20 years of experience in contract lifecycle management (CLM), information governance and eDiscovery supporting complex litigation, M&A and regulatory engagements.