Could your commercial agreements create greater flexibility for your business?

Elias Kheir, Solicitor

You have probably read a good deal of commentary by now on business contingency planning in the face of ongoing uncertainty. There’s a lot of great advice out there. But have you also thought about how your commercial agreements might help create resilience in your business as you navigate an uncertain 2021?

Efficiency or flexibility?

For so long businesses have “tuned so many things to be ultra-efficient, which is great when it’s not disrupted, but the thing about efficiency is that it actually can create brittleness or rigidity.” That is according to Chris Howard, Chief of Research at Gartner, who points out that now businesses need to “very resilient, so that as things happen in the environment we have the ability to flex.”

Gartner is looking at business strategy and planning, but we think many of the same ideas apply to commercial contracting. Once the best deal might have meant lower costs, greater predictability, agreements that you could ‘set and forget’ and never have to revisit. Recent events may have given a different view on how much flexibility businesses might really need.

Contracting for flexibility

Traditionally, contracts such as commercial lease arrangements were not an obvious place to seek flexibility. For most businesses, longer agreements with options to renew offered predictability for both lessor and lessee. In an unpredictable environment, flexibility may be more important than predictability. What we are seeing now is greater opportunity for creative problem-solving in lease agreements.

Parties entering new leases may be able to negotiate on length of leases, bond arrangements, rents or incentives.

For parties in existing lease agreements, there are still opportunities to negotiate. The government relief package requires parties to negotiate an outcome. As this package is set to wind back in March, we are advising clients to consider their lease terms and contact us for advice or assistance in negotiating amendments if necessary.

Planning for the unforeseeable

Many contracts include what are known as force majeure clauses. These are the provisions that excuse a party from performing their obligations in the event of wars, invasions, epidemics or other events that were unforeseeable and beyond either party’s reasonable control. In Australia, these contingencies need to be addressed in the contract.

While contracts such as commercial leases may once have only contemplated catastrophes such as destruction of the premises, force majeure clauses have assumed a much greater significance in contracts as businesses have been confronted with lockdowns and border closures, as well as fire and flood. If such events do become more frequent, views may change as to what kinds of risks should be considered foreseeable. It will become even more important to draft these provisions carefully so that parties are protected from events that were genuinely unpredictable.

What is at stake in your guarantees?

The uncertainty of 2020 has also brought a re-evaluation of what business risk looks like. In the past, small business owners might have been comfortable using their home to guarantee a loan for their business. After last year it may seem far too great a risk to make a personal guarantee. It is important to look carefully at any guarantee clauses. Alternatives such as agreeing to pay a higher bond may be more appropriate and allow you to make business decisions without the stress of knowing that your home is on the line.

What are you covered for?

Having appropriate business interruption insurance that provides a level of cover you are comfortable with is another way of providing some certainty and comfort in a time of uncertainty. This may mean a higher premium, so it is important to seek appropriate advice and find a balance that you are comfortable with.

Finding a way through a dispute

When you are entering into a contract, probably the last thing you want to think about is a dispute. But while you might not be concerned about dispute resolution clauses, these can provide an important framework to build in flexibility and options to resolve disputes before they escalate.

Flexibility in existing agreements

Even if you are already committed to a contract, you do have options.

We strongly advise clients to be proactive. We know many of you are apprehensive about the next few months as some of the government support begins to roll back. Please, don’t wait. It is not too late to renegotiate clauses in your agreements, or to seek greater flexibility.

While every situation is different, in our experience both parties to contracts recognise the challenges and understand the importance of ongoing business relationships. If you do anticipate business difficulties it is important to flag these early and approach the other party to the contract – you will be in a much better negotiating position if you can show that you understand what’s going on in your business, have a clear proposal, and aren’t already in the middle of a crisis.

 

Elias Kheir is a solicitor in Pryor Tzannes & Wallis’s commercial team. His main area of practice is commercial and corporate transactions. Elias brings a holistic and strategic approach to clients’ matters to ensure they achieve the best possible result.

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