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Vendor performance during social isolation

White & Case Technology Newsflash

For further information, please visit the White & Case Coronavirus Resource Center.

Every industry is at a critical juncture in evaluating how to successfully continue business operations in a period of unprecedented disruption. We have received a number of inquiries from clients, in particular those who rely on third-party vendors to service critical parts of their technology infrastructure, as to how to ensure performance of these services and how to mitigate the risk that vendors will seek to be excused from performing their contractual obligations. In this environment, there is a significant risk that governmental edicts (which sometimes change from hour to hour and differ across state and local jurisdictions) could have a domino effect on the continuity of a business’ operations. As a result, clients are seeking ways to ensure that vendors do their best to “keep the lights on” while they deal with managing their own workforce and internal operations from what has within a short period of time become for many a “work from home” / “shelter in place” posture.

Clients are pulling their vendor contracts out of their files, dusting them off, and taking a closer look at what many consider to be standard boilerplate language around force majeure events and business continuity plans. Clients want to know what they can do from a legal perspective to avoid service degradation, and what they can do to manage their expectations and relationships with vendors in these uncertain times.

In addition, we have received many requests to review “amendments” that vendors have asked clients to sign, many of which are preemptive attempts to get clients to agree and acknowledge the occurrence of a force majeure event.

We are truly all in this together, and we believe a practical approach to vendor relationship and risk management can help us all get through this period of uncertainty and provide valuable experience on how to address similar situations that are bound to arise in the future.

To cut to the chase, we will explain our general approach to vendor requests for force majeure acknowledgement. Then, we will present a checklist of good practices/things to do in order to proactively manage your vendor relationships during the pandemic.  We will conclude with our thoughts on the opportunities and valuable learning experiences we can all take advantage of during this period of crisis.

Over the past several weeks, clients have been approaching us to review vendor requests that generally include one or more of the following:

  1. Acknowledgement of the occurrence of a “force majeure event” 
  2. Advance permission for service degradation, possible service failures and waiver of rights to claim service credits and other remedies and
  3. Acknowledgement of additional risks to data security that may result from moving personnel to a “work from home” environment

Though all of these requests need to be evaluated on a case-by-case basis, our general advice is for clients to provide cooperative but firm responses. In what some have called the “fog of war”1 against the virus, some clients have been inclined to agree to these requests, thinking, “of course this is a force majeure event!”  We believe that the consideration of such a request should not result in clients acknowledging what the vendors and even they themselves believe to be obvious, since force majeure events and their impact on contractual performance are legal terms of art and at the end of the day should be subject to a rigorous legal analysis.2 Since most vendor contracts should have provisions addressing service failures resulting from force majeure events and business continuity provisions, we believe that the first response should be “no thank you, we are not inclined to sign this.”

Acknowledging the occurrence of a force majeure event and waiving certain rights or acknowledging certain risks would arguably prohibit clients from taking advantage of certain of their contractually negotiated rights and remedies. Clients should inform vendors that any performance failures that occur should be evaluated when the dust settles and a proper root cause analysis can be undertaken. Only then can a proper determination be made as to whether such performance failure would qualify for a contractual force majeure exception. Generally, we are not inclined to advise clients to agree to waive rights for potential failures due to currently unknown causes.

There are, of course, vendor contracts that expressly prohibit personnel from working outside of a particular service location (for security and other reasons) or where an agreed-to business continuity plan does not contemplate a remote work environment.  In such instances, assuming a client’s security team agrees with the contingency plan, clients can give written permission to temporarily lift any work environment restrictions.  However, these permissions should be narrowly tailored to address the new workplace reality to allow vendors to perform their work without violating the agreement.

We have been successful at negotiating these narrow permissions to allow for business continuity as workforces adjust to working from home. Some vendors, however, have taken the position that they will refuse to perform unless their more significant requests for advance relief are granted. We do not believe that failure to waive rights is a valid excuse for vendor performance failures (in particular, where there is a willingness to provide for the above-mentioned permissions). In such instances, it is important to stand as firm as commercially possible.  

Even if not presented with any vendor requests to modify existing contracts, the following actions should be considered in order to manage vendor relationships for the duration of the pandemic:

  • Ask your vendors for adequate assurances of continued performance (reaching out to your vendor relationship representative may be beneficial in any event to bring attention to your continued service needs)
  • If there is a service degradation and a provider is claiming force majeure, ask whether all of their clients are similarly affected (they may be prioritizing other clients’ work over yours, which may provide information or points to raise in your discussions when a root cause analysis is complete)
  • Review vendor and internal business continuity and other contingency plans to confirm that the proper remedial actions are being implemented  
    • Are vendors obligated to inform you of business continuity plan implementation and keep you apprised as to status/service management under such business continuity plan?
    • If there are restrictions on allowing vendors to work from home, consider with your security team whether giving permission for work from home is acceptable under the circumstances
    • Do contracts formally allow for electronic communications and signatures for documents like change orders?  Are there any prohibitions, requirements or restrictions on electronic signatures or communications under the laws of the jurisdiction governing the contract?
  • Get relevant contact information (email address mobile phone numbers) of the right vendor contact where issues can be immediately escalated and addressed if performance failures occur
  • Actively monitor vendor performance, as a good understanding of any performance changes over the duration of the pandemic will help in undertaking a root cause analysis of performance failures. For example, performance levels that drop off over time may indicate that the pandemic is not the cause of the performance failures

This is an excellent opportunity to evaluate vendor performance in a real-life situation where your own resources and those of your vendors are subject to unprecedented stress. Some vendors will rise to the challenge, and others will not. Clients can gain valuable experience with the implementation of business continuity and other contingency plans, as well as understanding which vendors best manage their client relationships and service delivery in times of crisis. Those vendors who successfully navigate these issues are poised to gain substantial good will in the market. Vendors who do not or who look for opportunistic outs can arguably expect the opposite result.

 

1 Jon Cohen, Interview with Anthony Fauci, SCIENCE, (Mar. 22, 2020, 7:35 PM), https://www.sciencemag.org/news/2020/03/i-m-going-keep-pushing-anthony-fauci-tries-make-white-house-listen-facts-pandemic
2 Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902-03 (1987)

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