As businesses grapple with balancing their books, managing cash flow and delivering timeously now that the economic effects of COVID-19 are being felt the reality many businesses face is that they are not able to comply with their current contracts, especially long-term contracts entered into pre-COVID. Perhaps supplying the required quantity is impossible with a smaller workforce. Perhaps cost cutting is necessary to avoid retrenchments. Perhaps suppliers or service providers are not coping, or worse, have closed. In these cases, and many others, there is little option but to approach business partners and renegotiate contracts to match the realities of the status quo.

Since every business is experiencing some difficulty due to COVID-19 and most recognise compromise is necessary, if you pre-emptively place a reasonable and fair compromise on the table, renegotiating your contracts can be a very helpful tool to manage these uncertain times.

Provided it’s done correctly.

To limit the risks associated with renegotiation and position yourself for the best possible outcome it would be good to keep the following in mind:

Anything can be renegotiated

Contracts, even verbal agreements, are binding. Failure to perform can result in a business being sued and possibly declared bankrupt.

But there is nothing untoward about opening a discussion on redefining performance terms. Any contract terms can change – provided the changes are agreed by the parties and properly recorded.

Never try to force a negotiation by saying ‘either … or I won’t be able to …’

This approach immediately evokes a feeling of protectionism in your contractual counterpart and places you at a strategic disadvantage. Treat renegotiating a contract as you would gaining a new contract. Trying to back somebody into a corner is not helpful.

Further, a statement to this effect may be an act of insolvency and, based on your statement, your contractual partner may be able to approach a court demanding your liquidation.

Rather say ‘given the challenging economic climate and the strain the protracted national lockdown is putting on businesses we were hoping you would consider…’

Don’t wait until you have no options left

In times such as these you need to accept time is not your friend. Waiting and hoping for the best is unproductive – especially when it comes to payment obligations. If a creditor serves a letter on a company’s registered address demanding payment of an amount due and it is not paid within 3 weeks that company is deemed unable to pay its debts and can be wound up. Don’t hope time will improve things – take a pre-emptive approach. If you foresee difficulty reach out and explain that there is a possibility you may struggle to make timeous performance. Put proposals on the table. Explain what you are doing to remedy the situation. People are more likely to be accommodating if you give them time to manage any consequential fallout but less likely to be forgiving if you have already put them in a difficult position.

Don’t admit in writing you haven’t done what you should have or that you won’t be performing

Businesses are run by people and when decent people mess-up they have a tendency to apologise and promise to do better. Unfortunately, by so doing you recognise an obligation to perform and that your performance was / will be defective. This puts you in breach of contract. If you are sued it is extremely difficult for a lawyer to help you out of this hole. The best we can do is help you negotiate a compensation plan – which is what we would have done had you come to us earlier – but now you have no bargaining power and the threat of court action, possibly winding-up, hanging over the business. This also makes you a bad credit risk and your chances of obtaining a credit lifeline become slim.

If it’s not done in writing it doesn’t count

Failing to ensure a contractual amendment is reduced to writing is one of the most common mistakes made when renegotiating contracts and, in most cases, where the amendment is not reduced to writing it is not legally binding. This is because almost every written agreement contains this clause: ‘No addition to or variation or consensual cancellation of this Agreement, including this clause, has any effect unless in writing and signed by the Parties.’ Do not agree to a change over the phone and assume the contract has been renegotiated. It hasn’t. At a minimum send an email confirming the change and have the other party confirm it by return email.

* Tammy-Lynne Bekker is a transactions lawyer specialising in sustainable and ethical transactions in Africa and a director at SDG Legal she can be contacted at tl.bekker@sdglegal.africa .