Alliances may be disrupted for reasons beyond partners’ control, ranging from pandemics to cyber attacks. They then look to the contract for a way forward. When obligations are not met, contracts focus attention on blame and penalties for the breach. Force majeure clauses may void a contract without penalties but they are typically applied narrowly, if at all (weather-related events, etc.). So, the parties must assess blame, assign penalties, and void the existing contract before finding a way forward even if a disruption could not have been anticipated or prevented. Economic recovery from the pandemic depends on many firms addressing this difficult challenge.
This negotiation exercise, conducted in a session at the SMS Milan conference, drives that point home. The context is a UK-based office equipment company (SmartTech) and their alliance with an Italian chip manufacturer (ChipComm). Italy was closed down by the pandemic while the UK remained open and the supplier was unable to meet obligations. The parties must determine if ChipComm is culpable and if so, what penalties apply. Then, they need to identify how they might revise the contract to move forward. Of course, building trust to move forward after assessing penalties is no easy task.
The exercise is straightforward in terms of the timing. We describe the setting and assign roles in class. Then they have 5 minutes to read the 2-page roles. We then pair them with someone who has the opposite role and give them 15 minutes to negotiate. They can then enter their contracts into a Google form which summarizes the contracts for class discussion. Here are the materials: SmartTech role, ChipComm role, Sample form for students to enter contracts.
This leads to a rich discussion of when contracts are harder to reboot (degree of trust, fairness/sharing losses, attribution of blame, contract language regarding penalties or bonuses, nature/extent of the disruption, etc.). For example, students may compare the pandemic context to a disruption caused by a less pervasive factor, such as a ransomware attack. Prior specific investments make both parties more committed to continuing the relationship – perhaps even if the specific assets are no longer needed. Then, the question is how to gain trust when the contract has failed, and who to involve in the process (lawyer cat may be less helpful here…).