Coronavirus crisis affected the most negotiated contract terms of 2020, Icertis survey shows

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Unforeseeable circumstances brought on by the coronavirus pandemic added significant pressure on companies this year as executives had to adapt, and supply chains were strained globally. A new report by Icertis, a provider of contract lifecycle management technology, evaluated the extent to which the crazy year dominated by the pandemic affected negotiated contract terms.

The report, “2020 Most Negotiated Contract Terms,” aims to help organizations better understand and manage their contracts. It draws from a survey of 8,000 negotiators, considering the most negotiated contract terms in 2020. The report highlights findings about commercial and contracting professionals, as well as the need to quickly adapt to unpredictable business disruptions.

As COVID-19 descended globally, the issue of "force majeure" (a clause invoked when unforeseeable circumstances keep a contract from being fulfilled) may have been expected to top this year’s ranking. However, the report notes force majeure as the 27th-most negotiated term.

While companies faced added pressures in 2020, Icertis noted that such pressures have also been building in recent years because of growing customer expectations, regulatory shifts, disrupted supply chains and changing market dynamics.

'Most important' vs 'most negotiated'

The report notes that executives identify different terms as being “most important” versus “most negotiated,” explaining that the most negotiated terms are based on issues like anticipating failure and liability, whereas important terms are more closely centered around an organization’s mission or values.

For example, survey results showed the most important contract term of 2020 was a contract’s scope and goals section, while the most negotiated term was a contract’s limitation of liability.

Terms regarding limitation of liability were most prevalently negotiated among organizations involved with aerospace and defense work; retail, food and drink-focused organizations; manufacturing and industrial goods; technology and hardware; and organizations working in the transportation and logistics industries.

The report also outlines ways to improve upon contract negotiations, such as emphasizing the need for contracts to deliver value to an organization and ensuring terms are clear, outlining a framework for managing change and supplementing areas of risk.

While survey results suggest that last year’s Most Negotiated Terms show limited changes compared to previous years of research, the report did note areas of increased importance.

Executives have had success by focusing on relational terms through structuring relations to anticipate change, the report states. Modifying relational terms can be achieved through various methods, such as adjusting the frequency or method of communications, or by clarifying the expectations of data exchange. Recommendations also include that negotiators should take an active approach to handling disagreements by anticipating expectations and where contract details could go wrong.

What about force majeure?

Bernadette Bulacan, lead evangelist and vice president at Icertis, told Spend Matters that while issues regarding force majeure may have been expected to rank highly as a concern regarding 2020 contracts, organizations have already begun to adjust to these unexpected circumstances.

“When the first COVID-19 wave hit, review of existing force majeure clauses was a significant challenge and top of mind for every business,” Bulacan said. “Organizations had to quickly determine which contracts were impacted, whether force majeure was in play, and quickly make decisions and act accordingly.”

Now, Bulacan explains that organizations are “coming to terms that our new reality will be one defined by ongoing uncertainty, whether a pandemic, a storm or some other major event.”

She added that rather than spending negotiation capital on defining what constitutes an act of force majeure, organizations can make better use of negotiations and capital by ensuring clauses in contacts are capable of helping contractual parties navigate uncertainty and mitigate risk.

As contracts are expected to become the core of transactions via commerce and contract lifecycle management, contract terms centered on risk prevention may become more essential.

Bulacan said organizations need to negotiate and understand the consequences if a contractual relationship dissolves.

“We must negotiate around risk consequence clauses like limited liability, termination and indemnification,” Bulacan said. “We also have an opportunity to include additional clauses to prevent friction, prevent the dissolution of the contractual relationship and work through those challenges.”

She suggests that organizations consider clauses that can support better communication and information exchanges, as well as supporting change management between the parties involved.

Bulacan said organizations should also evaluate clauses that address business continuity in light of disruption and determine whether there is technology available that can monitor risk by tracking obligations and the parties’ performance under the agreement. She noted that surveys have shown that with technology, data and training, “negotiators can do so much more on the front of risk prevention.”

The Icertis report was done in collaboration with World Commerce & Contracting, a contract management research association.

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