'Rethinking the supply chain' podcast series
Listen to episode two on renegotiating long-term contracts
If the initial, informal negotiations don’t resolve the issue, the long-term contract will need to be formally renegotiated. This means looking hard at the wording to determine where the contractual rights and duties of each party begin and end.
Contracts made under the laws of certain jurisdictions usually set out how any renegotiations should be conducted.
For example, German law may have negotiation clauses that set out a framework for the discussions.
In contrast, US contracts typically do not contain renegotiation provisions – although this doesn’t prevent parties from renegotiating, and may even allow more flexibility.
The obligation to renegotiate the contract often means acting in good faith, for example by not proposing unreasonable measures, blocking negotiations or (in Japan) betraying the other party’s trust.
What if your counterparty wants to get out of the contract altogether?
Although the contract may be long term, it’s not necessarily open ended – and may contain clauses that terminate the contract on the (non-)occurrence of a particular event.
However, such events typically cover changes in commercial circumstances not tied to unforeseen upheavals, such as lockdowns, caused by the likes of the coronavirus pandemic.