Negotiating Service Level / KPI and other reliefs in your services and outsourcing agreements during COVID-19 disruptions

The fast introduction and phased release of COVID-19 pandemic restrictions has led to many businesses struggling to manage loss of capacity and efficiency.

In the initial days and weeks of the pandemic that we all hoped would be short-lived, we saw businesses scrambling to understand their immediate practical and legal challenges – at that time, there was particular focus on the strength of any force majeure or ‘Act of God’ emergency protections that often feature as standard in contracts. However, as the pandemic continues, businesses are being forced to come to grips with the likelihood of sustained disruption for some time to come. This has led to a shift in focus where businesses are assessing their real-time ability to meet pre-agreed contractual obligations (particularly in the context of services and outsourcing agreements such as service levels, key performance indicators, turnaround times etc).

Suppliers that are unable to meet contractual obligations will need to look for a contract variation. This can be a big ask of clients, who may themselves be subject to Service Levels, KPIs, stringent timelines and/or regulatory obligations that allow them little freedom to deviate. However, there is generally a recognition that, where possible, we all need to work together – the alternative being to risk business failure and/or lengthy legal disputes. Indeed, we are seeing various governments leading this charge. The UK, for example, has issued policy statements recommending for public sector supplier relief where appropriate. Other countries, like Singapore, have enacted legislation allowing automatic temporary relief if certain businesses are unable to meet their contract obligations due to pandemic disruption.

For most suppliers wishing to deviate from contractual Service Levels, KPIs and other efficiency obligations (e.g. delivery timetables, milestones, penalty payments etc.) it will be necessary to negotiate a contract variation. While customers are likely to show some goodwill in the circumstances, there is no guarantee they will be willing or that they will see themselves as able to grant relief. Difficult negotiation may be ahead and our top recommendations to approaching these discussions are:

1. Consider informing your customers of your disruptions and their impact on an ongoing basis. No customer will look kindly upon a formal request for relief where they do not see a problem and are not aware of any issues.
2. Demonstrate why your performance levels are impacted and explain why you cannot reasonably prevent this. Make sure to communicate details of the mitigation activities you have already taken. Your customer will also want to know they are being treated equally to all other customers and are not disproportionately impacted. To get a variation through internal governance, your customer will need to know that you are not at fault and that you are doing all you reasonably can to maintain performance. Should there also be a reduction in cost if the full service is not being provided?
3. Know what contract relief you need. This should usually be the minimum level of relief necessary to allow your business to continue a contract without breach. Customers will not generally be willing to regard COVID-19 as a reason to accept reduced performance permanently. Be aware that your customer may require that any relief you do get is subject to periodic review.
4. Be prepared to put in additional effort. While many customers are trying to be flexible during the initial period of disruption, customers may believe it will be difficult to allow reduced performance on an ongoing basis, without a reduction in price. Many customers need, and are expecting that, their suppliers will increasingly be able to adapt and improve, with a review to restoring historic service levels, despite pandemic disruptions.
5. Know what your leverage and contractual strengths and weaknesses are before discussions commence. Being clear on these could inform your request for relief, your negotiating position and ultimately your ability to get relief.

Of course, once any such discussions are finalised and any changes/relief granted then it will need to be properly documented as a contractual variation to avoid any down-stream disputes!