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How to Future-Proof Your Contracts

     

We recently discussed the importance of having a plan to track contract changes. However, it is also extremely important to consider the types of changes that may be needed in the future and to build the appropriate language into the contract from the outset. This obviously requires a bit of foresight, but some situations may not be readily apparent and thus are not exactly easy to plan for ahead of time. For this reason, contracts must be drafted in a way that allows for some flexibility, when it is needed. Here are some of the possible changes that could impact a company's contracting and how to future-proof your contracts:

Leadership Shakeups

In many buy-sell business transactions, the buyer is expected to inherit the seller's assets and obligations. This is true on a small scale, such as when buying tenant-occupied property and thus inheriting the existing lease. And, it is also applicable in larger transactions, like when one company acquires another and thus acquires its outstanding contractual obligations, which in plenty of instances may be high in volume, value, stakes, or all of the above. In some cases, however, a potential buyer may not want to inherit a contract it did not enter into and/or the other party to the contract may not want to continue with the relationship under this new, unknown leadership.

 

Therefore, it is wise to future-proof the contract to prepare for these possibilities in advance and include a clause allowing one or both parties to cancel an existing contract in the event there are major leadership changes. This requires special attention and care, as any new hire should not be construed as a major change. But, there are ways to draft the pertinent clause in a manner that permits some flexibility without becoming an inappropriate out for one of the parties.

Organizational Changes

Even if the company leadership will remain the same, the organizational changes that companies frequently make could, and likely will, impact a company's contracting partners. It may be that an acquisition results in a significant change to the business or a merger essentially dissolves what had previously existed. Entire segments of a business may disappear, as well as portions of the company’s personnel. These are obviously situations that would require contracts to be revisited and perhaps canceled, so there should be a separate clause addressing this as well.

 

The way in which this type of clause is covered will really depend on which company is likely to acquire other companies as opposed to the company that is more likely to be acquired by a larger enterprise. In both scenarios, however, the other party to the contract should have the option of backing out because these changes sometimes just do not make sense for the relationship.

Economic Shifts

This is a tougher clause to include, but nonetheless important to take into consideration. There are some businesses that are extremely market or economy-sensitive. For example, interest rates and lending standards greatly influence real estate activity. Thus, certain real estate-related businesses are going to feel the effects of any downturns. For companies that depend on the success of a specific sector, any such downturn may prove too much to overcome and thus strategic defaults may be necessary.

 

However, if a company makes an effort to plan for this possibility, to whatever extent it is able, it may be feasible to downsize or temporarily stall until the economy improves, such as by getting out of some contractual obligations or the contract altogether. Granted, this may not seem like something that other parties would even be willing to consider, but contracts ultimately require a lot of give and take, and some kind of accord can be struck with the right amount of compromise. It is better to have a strategy planned out in advance than stubbornly demand compliance when breach may simply become unavoidable. And, if and when this does happen, the situation is far more likely to devolve into contentious and costly litigation.

Force Majeure

In general, including this sort of clause in contracts is fairly standard, especially contracts that  involve frequent deliveries or sourcing components from abroad. No one can predict or control things like weather or acts of terrorism, but when they happen, and they clearly do, they are bound to have a substantial effect on countless companies. As a result, it would be downright foolish not to factor these potential "acts of God" into the contract to provide some level of protection when they occur, and they will occur.


Even if there is a good faith principle that companies must recognize circumstances beyond the other party’s control and offer some level of understanding, this does not always happen. Thus, it is best to future-proof the contract for any such occurrences by ensuring that there is a clearly delineated force majeure clause.


Contracts are obviously meant to obligate their signatories to specific terms and conditions, but they can still be drafted in a fashion that affords the parties occasional leniency. The key is to be forward thinking and flexible, and more importantly, to plan accordingly.

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