Key Supplier Performance and Contracting Issues: Through the COVID-19 Pandemic and Beyond

Date: May 6, 2020
Hello and thank you for joining our session today on supplier performance and contracting issues in the midst of the COVID 19 pandemic. I’m Jason Krieser for McDermott Will & Emery. We’re fortunate to be able to present to you today with two of our longtime friends from Alvarez & Marsal, Kevin Smilie and Brian Smith. Kevin Smilie is a Managing Director of Alvarez & Marsal, where he advises clients on technology strategy, performance improvement, and outsourcing. Based in Dallas, he previously served as CIO at a multi-national retailer and has held executive and leadership positions at major technology services providers and the major airlines. Brian Smith is a Managing Director of Alvarez & Marsal, where he advises clients on technology transformation, governance, and outsourcing. Based in New York, he previously held executive positions at a major technology services provider and at two leading international banks. Shawn Helms is the co-head of the Technology and Outsourcing practice at McDermott. Along with Sean, I’m the other co-head of our Technology and Outsourcing practice. Sean and I lead a team of lawyers at McDermott, supporting clients on technology development and licensing, joint ventures, alliances, key supply and distribution agreements, internet things, any commerce matters, artificial intelligence, and robotic process automation matters. And, of course, we have for the past 25 years, represented both customers and suppliers in outsourcing arrangements. During the presentation, we welcome any questions that you may have. Please feel free to use the Q&A function that you see in the Zoom menu bar to submit your questions. We will answer those at the end of the session or follow up with you, if needed, with our answers. Let me turn it over to Kevin Smilie for an overview of the first portion of our agenda.

Thank you, Jason. Brian and I are pleased to join you and Shawn today for the webinar. The first part of the agenda we’re going to really focus on the operational side of things and driving supplier performance in the current circumstances. We’ll do a brief introduction to A&M. We’ll move into a discussion about the operational impacts on liquidity that the situation is having. We’ll cover the need for scenario planning to proactively manage that liquidity. And then take a step further into that topic by prioritizing IT spend and how it will impact our third-party providers. We’ll then close with actions to align third parties to your direction, and actions before turning it over to Shawn. Shawn?

Right. Thanks, Kevin. So, on the McDermott portion of the presentation, we’ve obviously been dealing with a lot of contract issues, both, sort of, process issues and specific contract amendment issues that have come out of COVID. The first item we’re going to talk about its entering into a contract during COVID, which is, which has changed a little bit and brought up some additional considerations. We’ll then talk about contract performance issues and what we’re seeing there with clients. What the vendor and customer reactions have been in some of the specific items that, that we’ve been dealing with, as well as common amendments. And talk a bit about what are the contractual provisions that are being impacted? And how do we, how have we been adopting those in the midst of the COVID crisis? And then we’ll spend a bit of time at the end talking about going forward considerations, and what should we consider now that we’ve had the COVID experience. And what should we be thinking about doing in these contracts going forward?

All right. Well, let’s get started. Next slide, please. Just a bit about A&M to get us going. At A&M, we focus on helping our clients deal with complex change. Regardless of the underlying driver for the need to change, we bring an action oriented and fact-based approach. In the current circumstances, most companies have taken immediate steps to continue operating. But as the crisis continues, the need to act decisively and position for the future will be critical for recovery. Next slide.

This pandemic is impacting the entire global economy, and there’s really no end in sight, at least until we have a vaccine that could be broadly distributed. Given that there’s a huge impact on all businesses, ranging from a complete shutdown, as we’ve seen that a lot of retail and travel, to the other end of the spectrum, with material increases in demand for logistics and transportation of critical goods, laptop computers for the business environment and, most importantly, for all of us viewing this today, remote access platforms so that we can continue to communicate and conduct business. However, the one consistent issue for all businesses is the impact this is having on revenue and liquidity. In the outsourcing market, analysts are indicating the buyers of services are seeking price reductions of 20% to 30% along with extended payment terms. This could easily cause material margin and cashflow issues for third-party service providers, especially those offering traditional people-based managed services. Further, for smaller service providers, these types of actions could cause an immediate liquidity problem. Companies that are the buyers of services need to plan carefully and balance their cash management strategies with the need for essential services. And the provision of those services from their partners. This situation is a problem for both sides of the equation, the buyers and the sellers. So relationship management and collaborative demand planning will be critical to both parties’ survival and recovery. Next slide.

So there’s some scenario planning that’s needed in the situation. And, step one is to create a baseline case in scenarios for at least a 4 to 6-month timeframe. The scenarios need to address the demand for services, project timing, financial imperatives, risk assessment, and to identify trigger events, it would cause the direction to shift to a different scenario. The revised business scenarios and trigger points that would cause a company to take action should be shared with their supporting third-parties to ensure alignment when responding to challenges as they arise. The baseline scenario would identify variables and monitoring requirements to be able to react quickly to events. For example, the base scenario could assume that the work from home requirements in India ends on May 31st. But there’s a separate scenario for actions that would be triggered if work from home was relaxed or changed or extended. Next slide.

Step two in this process is to stress test each of those scenarios. Since the scenarios were pulled together, all the variables impacting both the buyer and the seller that could change plans should assumptions not be met so that these can be tested against the various projections. This will enable the development of a negotiation strategy to be used to engage with third parties. And, as a starting point, react the scenarios that they raise, because they may have conflicting needs and conflicting perceptions of what will drive success. Active relationship and contract management processes will be essential to ensure alignment and the collective ability to pivot when necessary. With that, I’ll turn it over to Brian. Brian?
Good morning. So now is the time to step back and start to rethink the IT delivery model for the future. All organizations have moved quickly to enable their staff to work safely and securely from home. There are indications that up to 80% to 95% of IT service provider staff are now effectively working remotely. But there’s also been a somewhat associated drop in productivity, maybe around about 20%. So reviewing the overall portfolio to understand the impact on how each service provider is handling the situation will enable companies to understand the change in the risk profile and to identify actions that may be necessary. Such as policy revisions or additional reporting, insourcing, or moving work between service providers and captive entities. The crisis has had a significant impact on the economy. Companies, including IT service providers, now need to evaluate the impact on liquidity at both short and long term. As Kevin said, many companies are conserving cash, seeking to defer or reduce cash payments by extending payment terms and reducing rates. So service providers need to really think about evaluating the risk of making individual accommodations against their overall portfolio. They have opposing needs to their clients here and they may actually need accelerated payment terms. So the spending patterns are going to change and there may be a move to defer cap, CapEx projects and reduce OpEx to conserve cash. Some organizations have already started to rethink their internal versus outsource mix. And in some cases, they’re evaluating the need to have their own offshore captive entities. So it may no longer be feasible or desirable to implement some of the IT projects that are underway or were underway. And it may not be appropriate to start new projects as originally envisioned. Timelines for all types of deliverables have been impacted and will continue to be impacted. So complete review of the project portfolio is necessary. To reprioritize, re plan and re baseline, obviously in collaboration between all the third parties involved, and to try and figure out what can and cannot be achieved at acceptable cost. And also to address the impact of the many delayed deliverables. The impact of delayed deliverables is significant in third parties and could manifest in many ways, such as reduced cycle times, lower productivity, higher error rates. And for IT projects, particularly fixed price projects and deliverable based projects, there could be a significant risk for third parties who may have accumulated work in progress, that they cannot deliver, or bill as originally planned. And these could turn into significant cash flow problems. We think that the rapid adoption of digital solutions will continue. So the new IT baseline needs to encompass the fact that that’s going to happen and adapt to the reprioritization of the various initiatives necessary, which I think will generate a lot of contract change orders and potentially disputes. So capacity has been freed up in some areas and stressed and others. The demand for all types of services has changed. So understanding the impact on the IT services portfolio will inform what really needs to change in the future to create that new baseline. And finally reviewing the demand forecast and aligning with the scenarios developed for in the origins and recovery is going to require a much more agile contract management process and will challenge some of the traditional approaches that had been used for pricing, in particular outsourcing services. So if we could turn to slide 10.

Once a revised IT baselines been established, the next step is going to be to realign the vendor portfolio with the new imperatives. This may require reducing or expanding individual relationships, relocating work, and revising the overall approach to risk management. So it’s important to focus on control. Many policies and procedures currently in place prohibit or place restrictions on remote working. And steps will need to be taken to regularize these to align with the inherent risks of the new reality and to implement new mitigations. Revised risk documentation may be needed to ensure regulatory and contract compliance. We know of one organization that’s already processed more than 50 risk exemptions. The last few weeks has caused all companies to implement their business continuity plans. So now it is time to step back and review what worked and what didn’t. And to reassess the critical dependencies on third parties, on their locations, the infrastructure, and the assumptions that underlie the existing operating models. Rethinking a resiliency of the overall portfolio, and the resiliency and the viability of every third parties BCP plan is going to result in changes to the overall risk assessment mitigation approach and the IT service delivery model. There’s no doubt that as we continue to deal with this crisis, start to plan for the recovery phase, there will be a lot of change to be managed. Some third parties will have demonstrated the capability to change and manage through the process. Others will have been less effective. And companies are going to be establishing new guidelines for spend management. So this is really a perfect time to review the overall third-party portfolio and look for opportunities to improve. If you turn to slide the 11.

Really to conclude this section, we believe that as we merge from the crisis and position for the future, an active approach to managing the third-party portfolio is really essential. Portfolios may have decreased or increased; the makes may have changed. And there may have been a fundamental change in expectations from end customers. So it’s definitely not a return to business as usual. So rebuilding the current fact base is essential. Reviewing third-party segmentation classifications rules to reflect the current situation and the likely merger scenarios is going to be important as is redoing financial diligence. Existing business continuity plans that rely on geographic separation for resiliency may have proved irrelevant. So new approaches, based on the experiences of the last few weeks, may be better alternatives. It may be appropriate to completely rethink the makes of in-house versus outsourced services and onshore vs offshore services. And rethink completely, how the portfolio of IT services is diversified. Quickly identifying liquidity and related service delivery issues is the key immediate action. And they should be followed up by reviewing and adjusting the third-party portfolio. Critically for the future, supporting essential third parties to ensure that they survive and are able to continue to deliver services of the required performance levels for the long term. So these, I think, are the steps we believe need to be followed in order to start to realize what has happened and institutionalize it and plan for the future. So I’d like now to hand over to Shawn, who’s going to discuss some of the legal considerations and options for addressing the contractual issues that are starting to arise as all this change takes place.

Great. Yeah, thanks a lot, Brian. Appreciate it. So, next slide, please. Again, we’re going to, we’re going to cover where these operational matters and considerations meet the contract. Let’s go to the next slide.

During COVID, we have been providing some interesting advice to customers regarding entering into a contract. Even for, you know, the biggest, most strategic deals, people aren’t getting together and, you know, putting ink on the page anymore. And so the signing ceremonies of the past in the paper contracts have just not been happening over the past couple months. So, clients are doing a few things. One is, they are taking advantage of the e-signature applications where your electronics come in PDFs. So think of the doc you sign and the related applications. And so we’ve been providing a lot of, by some the utilization of those. We also have clients that are moving their traditional paper contracts to more about click-wrap, where they are taking their existing terms and conditions, they’re putting them online, and then allowing for a click through process. We’re also advising clients on what, what I call, alternative approaches to entering into the contract. So, for example, we’ve, we’ve had clients that have called us and said, okay, we’ve emailed over the final docs and they’re not able to execute them and scan them back. We just have them respond by email and say I agree. Well, obviously, that’s not, that’s not the best practice. It’s not, it’s not what we would want from an evidentiary standpoint. But, depending upon the state you’re in and the actual circumstances at the time, there isn’t any reason that that can’t work. And so, we’ve been stepping people through, what I call, alternative processes to agreeing to the contracts. And these are things that, that, that we would never do in, in what I would call, sort of, normal times. But given the speed people are moving and doing things like executing contract amendments, we’ve even had clients that have asked us on some critical amendments. We just put this in front of the supplier and make a statement that says if they don’t reject within 10 days, that they have agreed to these terms and conditions. And we have been talking to the clients about all right, what, you know, what are the risks in that? Can we also put a backstop of, okay, if you perform against these terms and conditions, have you agreed to them? These are things that are, sort of, law school hypotheticals, right? Your classic offer and acceptance. Has there been a counteroffer? If they call up and say, yeah, we can agree to this, but we need to change this one little thing, is that okay? And so there’s evidentiary concerns involved here as well. And you also have to consider the statute of frauds in these instances where there has to be certain kinds of contracts that are agreed to in writing by both parties. So, these are unprecedented times in terms of considering what needs to happen when entering into a contract. But, but all those things that the lawyers on the phone learned in law school still apply today. And there are, and there are some alternative approaches that can work. One other thing I wanted to mention is the notarization of a document. Aa lot of the states require an in-person notary. And the states have been moving quickly to adopt different kinds of remote notarization processes. As of a couple weeks ago, 41 states have allowed some kind of remote notarization. And there’s actually a bill moving through Congress right now that would potentially introduce a remote electronic notarization as a law in the United States that then all the states could latch on to. And so, we expect there to be major changes in the notarization requirements in the next couple months. Next slide.

Okay, I know we’ve got a lot of experienced dealmakers on the call, lawyers, other advisers, and so we’ve all heard the concept usually brought forward, and with all due respect to our business colleagues on the call, usually brought forward by our business colleagues. Let’s just put the contract in the drawer once, once we get it signed. Well, guess what? The contracts are not in the drawer anymore. They are being pulled out. And this slide shows some of the provisions that our clients and Alvarez & Marsal’s clients are looking at right now in light of, of COVID. On the left side, these are provisions, not all of which you would find in most contracts. The more complex, the higher value the contract is, the higher dollars, the more likely it is that you have these provisions. Lots of contracts are going to have the first one, a force majeure provision. And lot has been written and said on that. And we won’t, we won’t digress too far down that road. But certainly this is one of the key provisions that vendors are looking to as an excuse from being able to perform or being able to perform in terms of the level of performance, the level of timeliness set forth in the contract. And we’ll talk, a little bit later, Shawn will mention some of the notices that are going back and forth in regard the force majeure provision. Most contracts, certainly all, all material services contracts are going to have service levels. And service levels usually come with service level exclusions and excuses for failure to perform in accordance with them. Those are provisions that are certainly being reviewed closely right now. The vendor is prohibited from performing in accordance with those performance levels. Change control. There are there reasons that COVID is bringing forward facts and circumstances that do not line up with the benefit of the bargain that the parties entered into. Some key services contracts are going to have in them specific assumptions. Those might be volume assumptions that can no longer being met, and that might drive, change, change control order. There’s certainly the possibility that the parties don’t see eye to eye right now. And lots of strategic contracts are going to have in them some informal escalation terms in them to avoid moving towards a formal dispute. And we’re seeing a lot of clients go through those informal escalation processes now, as they try to work through issues that neither party was really expecting. Some contracts will have in them a saving clause, which will, the more complex the contract, the more likely it is that the customer is also going to need to enable the service provider in some way to deliver the services. And if the customer is not able to do its roles and responsibilities in the contract, the service provider might look to the savings clause for relief on time or, or being able to deliver at all. And compliance with laws. This ties into the first one the left side, the force majeure provision, but certainly compliance with law provision might be implicated by stay at home orders, travel restrictions, things of that nature, which are going to limit the service providers ability to perform at the moment. On the right-hand side, these are some terms that we see customers looking to right now in terms of relief in light of COVID. Some contracts these are rare, but some contracts will have a business downturn provision. And the provision will look something like, if, for at least X number of months, sometimes three months, sometimes up to six months, the need for the services or the product materially changes due to a change in the customer’s business or need for that service of product, there’s usually a repricing trigger discussion that will happen in light of the new normal. Customers that have those provisions are looking at those right now. We also put force majeure on this side of the ledger as well. If you think about things that a customer might look for relief from, things such as if there’s any sort of minimum commitment terms that the customer is subject to. And they can use the force majeure provision to argue that there is relief from those minimum commitments. We see some customers looking at that and considering it right now. Many of the agreements are going to have a number of termination rights, which could be under consideration right now. Force majeure event is an obvious one. If the service issues become chronic, there’s usually going to be a chronic service level failure trigger. If some key personnel have been moved around off the account are not available, there’s turnover. There’s redundancy among key personnel. Sometimes that can be a trigger for a termination right. If not rising to the level of a material breach, there’s usually going to be provisions which say that a number of non-material breaches, which in aggregate, culminate into a material effect on the contract, that termination right may be implicated. Lots of the contracts will have termination for convenience rights in them and will usually come with a termination for convenience fee. When you see those fees they’re usually declining over the term. So, whether or not, and if a customer didn’t have another termination right to look to, whether or not termination for convenience would be considered will often be driven by where they are in the term, and at what fee they would be subject to trigger that right. If the termination rights are triggered, some of the contracts will have in them the right for the customer to hire a certain number of vendors employees, usually which have been materially dedicated to the account in the six-month period prior to triggering the right. Some agreements will have step-in rights in them. We don’t see those triggered very often. And query whether in COVID circumstances, the customer would be in any better position to step-in and perform those services, you know, bring them, bring them back into line than the vendor was. And then, a lot of times there will be provisions for fee relief in the event the service provider is unable to perform. Next slide, please.

Yeah, and let me just talk a minute about the, the kinds of calls that we’ve been getting. Our team has been getting calls, you know, almost every day. I think if you if you if you average them out over the, the COVID period, it’s definitely more than one a day, about how to respond to, or whether to provide a force majeure notice. You know, these notices are not, not a surprise. And they’ve been coming from all different kinds of industries. With our, with our outsourcing customers, almost all of the outsourcing providers have had to provide some sort of notice to modify the service delivery. Even if it’s just a basic as, in most of the outsourcing contracts, there’s an approved locations provision. And these are locations where the customer has done due diligence, where they have confirmed that they’re comfortable with the infrastructure and, and you know, all the things involved with the service delivering. The PCP, you know, what, what does the physical security look like? All those things are often taken into account. While when, when COVID happened and all of the resources providing the services started working from home, well none of those were an approved location on the list. And so, that, that changes a number of things that that we’ll talk about later. But at a minimum, the, the, the provider is in violation of the approved location provision. Whether or not the contract actually anticipates a pandemic as being one of the things that would trigger the force majeure probation and therefore, excuse performance in accordance with the contract terms, that’s, that’s really a question of what’s in the four corners of the document? And what is the governing law related to the force majeure? In certain civil law countries, so, so outside of the United States, even if there is not a force majeure provision in the contract, if the situation does not allow for a, a company to perform in accordance with the, the terms and conditions, then there will be an excuse. We have those type of common law excuses in the United States as well, where you have the doctrine of impossibility or frustration of purpose. And, so the force majeure notices may claim the relief within the four corners of the document under the force majeure provision. Or they may make other common law or civil law arguments. Each of these, there’s no sort of, you know, universal answer on any of them. The first thing that we normally do when we are contemplating either providing the force majeure notice or advising a person responding to it is, is to look at the contract. And have the, have the procedures in the contract been, been followed to the letter of the contract? Have they provided the notice in a timely way? If, if the force majeure is actually covered and they have provided notice in a timely way, have they fulfilled the other obligations under the force majeure provision? In other words, in a lot of our outsourcing contracts, for example, even if there has been a force majeure, the party impacted by the force majeure has to take steps in order to try to work around the force majeure. And they’re only excused to the extent that the force majeure is, is actually continuing and it’s actually preventing or delaying the performance. And so you have to look at all those issues. And, and the, to get back to the bounds of the force majeure, the other thing we obviously take a look at is, what is the governing law under the contract? I will tell you that certain states more narrowly construe the force majeure prevention than other states. And so, you know, not only do you have to take a look at the four corners of the document, but you also have to take a look at the applicable state law. Next slide.

So what are some of the common amendments that that we’re helping either customers or providers work through? Well, one I’ve already mentioned, and that is the approved locations or facilities. And this comes up not only in the outsourcing context, but, if you’ll, if you’ll remember back to, sort of, the olden days before a cloud, a lot of software licenses also have an approved location provision in them that would state things like the product can only be installed and utilized at, at location X at this location, right, where it would have a specific address. If you have any of those legacy products around and people are now working remotely in order to access the application, are you in technical compliance with the restriction under the license? Well, that that’s, that’s really a question of, what are the words on the page, but they should be considered. I will tell you we, we have heard from at least one of our clients that they’ve gotten a knock on the door from a software provider, where they have a perpetual license to this product, but they’re not really utilizing them anymore, and they’re not paying maintenance. And so it’s running on a legacy piece of equipment but is being accessed by people remotely. That’s software provider is now claiming that this customer is in violation of their license, right? And it’s really just a way for this provider to get back on their radar and maybe get them to start paying maintenance and maybe move them to their cloud product. But, but, you know, I’m bringing up this story because software providers are, you know, at least in a few instances, taking advantage of the purpose of … environment and looking back at some legacy terms and conditions, or to get the leverage on the customer that they may not have otherwise had. Jason talked a bit about service level commitments. A lot of the service level commitments agreed to in a contract presume that you’re going to be operating in a high bandwidth, highly redundant environment where all the people that were utilizing the application would be on the local area network and wouldn’t be dispersed around the world working from home on potentially slow internet connections. And so we’ve had questions about missing the service level commitments, even reporting on the service level commitments. A lot of these SLAs have the, these service level capture, the data capture products, that are not equipped to capture the service levels in a work from home environment. And so we’ve had to look at modifying or adapting the SLAs to this new work from home situation we’re in. The third one is the physical security requirements. Obviously, those are extremely challenging when people are not working at the physical location that was anticipated. And so we have customers that are allowing an excuse to the physical security requirements, provided that there are other security requirements put in place. And I’ll just move to the next point. That is electronic security requirements. So, a lot of the electronic security requirements have had to be adapted. So think about a person working from their home office, and they’re working on a computer screen with other people that are in the house. And maybe they’re walking by the screen and looking at confidential information. Okay, well, do we need to now have a security requirement that, sort of, bridges the physical and the electronic security requirements where you have a screen protector on your laptop? Or you obligate the people to ensure that you’re in a situation where no one else can view the confidential information on the terminal. We have had clients that are trying to deal with the PCIDSS security requirements and a work from home environment. And so there are restrictions on the storage of, of, of card data. And how does that work in a work from home environment? How do you handle audit rights? A lot of these audit rights are crafted as if a person can walk into a conference room and have all the materials presented to them to do an audit. Well, that’s not happening now. And so how do you exercise an audit right? How do you, how do you perform an audit on a person that’s not in an office, that is working from home? Obviously, auditors aren’t going to go marching into people’s houses. And so, reconsidering the scope of the audit rights. Complying with customer policies. I’ve had a number of my providers, my clients, that have inquired about, how do we comply with these customer policies that anticipate that we’re in these lockdown facilities? And it’s just not, just not possible in a lot of instances. Jason mentioned compliance with law. You may have, in one part of the agreement that you can only performed the services from an approved location, and then another part of the agreement, there’s an obligation to comply with law. Well, what if law states that people can’t go to the approved location to perform the work? You, you now have two provisions in the agreement that conflict with each other, and there is no priority of one over the other. And so obviously, comments sense has to prevail in these instances. But, but we just note that the compliance with law provision may be a provision that is impacting other areas of the contract. And then the last one is, how do we change the business continuity disaster recovery plans in the new environment that we’re in? There, there likely needs to be a change. When people are working remotely, are there specific desktop terminals being backed up? And is that now a requirement that was not anticipated in the specific BC plan? And, and then, a lot of these are more business continuity plans. As opposed to the data backup, have you anticipated the people aspects of the business continuity? I will say this was actually more common 20 years ago than it is now. And surprisingly, we’ve gotten away a bit from the people aspects of these business continuity plans. And dealing with or anticipating a pandemic and dispersing the work to other parts of the world or dispersing the work to people that are working from home, are now new things that, that need to be considered in these plans. Next slide.

Okay, Shawn covered some common amendments that we’re seeing right now. A lot of those are frankly being put in place in more of a triage mode. That, as we all get used to the new normal, these are some topics that we think deserve some, some thoughtful consideration. There’s some overlap here between the triage mode topics that are the subject of the current amendments, and ones that we think continue to deserve some strategic thinking as we, as we adjust. In the same way that, and starting right off with business continuity and DR, the initial band aids are being applied, but in the same way that September 11th, Hurricane Katrina, the prior financial downturn, all forced us to think differently in light of some shock events. We think both of the first two, frankly of business continuity disaster recovery and information security area areas where there will, there will continue to be thoughtful analysis as to how we adjust to the new world on those important topics. Other considerations that are going to be found in a lot of contracts, a lot of these services agreements are going to have in them the flexibility for the customer to insource or resource. As Alvarez & Marsal mentioned, as customers really think about how their supplier base looks going forward, they’ll look to these provisions to, to look over the horizon a bit and think about what works best for their organization. Being mindful, of course, of any minimum commitments that are going to be in the contract, but in light of the current event, will customers be able to find some relief from those commitments? Answer is usually going to be dictated by the facts and circumstances as well as, as Shawn mentioned, the governing law that applies. John mentioned that service locations are going to, they’re already being rethought and going to continue to need to be rethought as we look to the new normal. Knowledge sharing. These are provisions that you will find and usually don’t get a lot of attention, but they’re in a lot of agreements. As the customer needs to figure out how to either take some responsibilities back, perhaps resource some of those to another service provider, making sure they have a good understanding of how those services are being delivered will be important. If termination becomes one of the options that customer needs to consider or triggers, there’s termination assistance that, that will be implicated where service, the existing service provider, the incumbent, will, for period of time, perform while that work transitions either back in-house to the customer or to a new service provider. And to enable either that delivery in-house or by the new service provider, there might be third party contracts that an incumbent was relying upon, that in the future, the customer or new provider would rely on. The same is true for intellectual property. Tools that the existing agreement may give the customer rights to use post termination or even potentially, depending upon the tool and the terms of the agreement, the right for a new service provider to use when delivering to that customer. Next slide, please.

We’ve had a couple of questions come in. And, I will go ahead and, and state these. I think both of them, Shawn, are probably best for you to answer. They’ve got a little bit more of a legal bend to them. We had a question about, what about international contracts that would normally require legalization or an apostille?

Yeah, this is, this is this is not all too different from the notarization requirement in a lot of ways. And we’re, we’re, we’re seeing, you know, a number of different creative solutions. Most of the time, this is just, you know, this is just done remote with, with, with people mailing things around or, or, you know, taking different approaches to approve them. I, you know, I’d be interested in, and, you know, I wish we had one of our, one of our European colleagues on to, to, you know, understand that there is, some sort of agreed process, now that they’re moving towards like, like we are in the United States, I just don’t know what the trend is there.

Yeah. The only thing I would add on that one is that, I think, to the extent that legalization, and certainly in the case of an apostille is being required by governmental authority, probably lower likelihood that some of the informal techniques that we talked about, that clients are considering, would be, would be sufficient. I think those techniques are best used when you’re showing a find or a fact later on that there was a set between the parties, and I suspect a lot of governmental authorities would not find that to be sufficient under the circumstances.

Yeah, I think that’s exactly right.

One other question, which is a bit of a bit of a hybrid, so invite the Alvarez & Marsal viewpoints on this one as well. Have you had any experience yet with suppliers trying to pass through increased costs under a contract that has a fixed price and does not allow for passing through increased costs? I’ll go ahead and, and stop there and get some viewpoints.

Yeah, and, and I’d be interested in the Alvarez & Marsal approach as well, or, or experience. Let me just, sort of, quickly say a couple things. One is, and, and we didn’t cover this in the force majeure, but it is generally the case that a force majeure provision will not excuse payment. So that’s sort of the flip side of that, of that, of that question that we didn’t touch on before, but I want to mention it now. And that is, you know, a tough business downtime or, or, you know, not, not having money because there’s not customers walking in the door will not generally be covered by the force majeure provision. And to the specific question, have we had customers reaching out to us where providers are basically asking for more money in order to help them cover the cost here? We have. And, but, as a general matter, the contract is a contract. And so they’re not quote entitled to that money at all. Now, you know, might there be a scenario where a customer with a critical provider would be willing to cover some, you know, one-time cost in order to help put in place another resource that then they could deliver? Maybe, but that’s, that’s more of a business discussion. I don’t think there’s a little legal reply to that. So if, you know, if the question is, would a court, for example, put a customer in a scenario where they would be obligated to pay that additional money? I think the answer is no, that, that there would never be an instance where a court would read in a term into a contract that would be required to pay more money. Now, if a provider isn’t otherwise able to perform because of the specific force majeure event and you have to come up with a totally new solution, then that, that may be an instance where the parties practically get together and, sort of, have a discussion to get to the right answer.

Yeah. Thanks, Shawn. Brian and Kevin?

Yeah… Brian. I would just say I think this is where good relationship management comes to the fore. I think there could be, the service provider may not be able to complete the project for some reason. But equally the buyer, the client in this case, may not be able to receive the completed project. So, there could be many reasons fora supplier seeking to recover costs or, or charge for extra services. So I think, it would have, you have to look at the circumstances. I think you’d have to get both parties to really sit down and think through what they really want to do. I, I think a bit tricky thing to, to resolve. I haven’t seen an example emerge yet, but I certainly anticipate that this is an area where there’s going to be a lot of challenges because there’s going to be projects which are at the point of implementation, which are maybe no longer required. There’s going to be ones which can’t be implemented in in the current circumstances, or perhaps shouldn’t be implemented. So I think this is going to be a tricky area of discussion, which is going to be both a business problem, and then, I think, potentially a contractual problem in resolving how to untangle what has been done.

And to that point, in any of these cases where the service providers making requests like that, the client’s question needs to be, what is the impact on my business operation if I don’t do this? And is that, is that impact greater than agreeing to some short-term financial arrangement with a provider to make sure the services could continue to be provided at the level that’s needed. Not necessarily at the level that was, that was negotiated and agreed to. So that, that’s a relationship conversation and it factors in the business need associated with responding to the request. I think without that, the client is potentially putting themselves at greater risk having that conversation.

Yes. One, one, you know, one point I’ll make on that. And there’s probably a lot of practical, reasonable solutions to a lot of these. One point I will make is that, if a provider is actually able to perform, if they just put in place, you know, you know, three more computers and two more people and then they’re able to perform, well, then the force majeure is not preventing them from performing, okay? And that, and that’s an important point. It’s that just because it costs more money to perform, does not give them a contractual excuse under the force majeure provision. And so, you know, I think in each of these situations, you have to look at what’s actually happening and have a reasonable business discussion about it. But what I would encourage my customers to guide clients to do is to, you know, make sure you’re not being held hostage. And that, that where people are using COVID as a bit of a pretext in order to increase their margins.

Thanks, Shawn. I would like to thank our co-presenters today at Alvarez & Marsal. Brian and Kevin, thank you very much for joining and thanks for your insights. To all of the viewers, thanks for your questions, thanks for making time today to join the session. You saw in the prior slide, both Alvarez & Marsal and McDermott have a very extensive a database of Coronavirus information. Hope that’s a good resource for you. We’re also going to be circulating a link to the video of this webinar and the slide deck itself. I hope they’re useful to you. They have our contact information in those slides. Please feel free to reach out to any of us. We would be happy to help. Thank you very much for attending today.


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