Tips For Contracting in Uncertain Economic Conditions

Contracts should be designed for uncertainty. They should expect the unexpected and lay out a plan to help all parties navigate turbulence within the relationship and broader economy or business environment. However, they aren’t always written this way – and we regularly see contracts that don’t adequately plan for hardships, but instead just lay out basic terms (plus maybe a dispute resolution clause).  

As a result, we’ve seen increased interest in more flexible contracts that balance operational needs with the potential for unforeseen cost fluctuations. In this post, we’ll outline some key contractual terms to help your business navigate uncertainty within the economy, and list some of our key tips for reducing legal risk, too.  

Key Contractual Protections in Unpredictable Markets 

These are some clauses that you may either want to add to your contracts, or update if you already have them:  

Traditional contract clauses that may require updates 

Force majeure clauses 

In the past, these clauses have been used to essentially end the contract (technically, suspending performance of the contract) due to ‘acts of God’. They were intended to cover situations like flooding of a warehouse that ruined machinery, and the like.  

Modern contracts should be broader, encompassing things like pandemics, labor strikes, widespread supply chain failures, significant economic downturns, and currency fluctuations outside of an expected or acceptable range. Ideally, your force majeure clause should also outline what’s expected of each party if they’re unable to perform their contractual obligations due to defined external circumstances, such as communication expectations and a duty to mitigate damages.  

Termination and exit clauses 

The exact changes your termination and exit clauses may need are likely to be quite particular to your business. However, we suggest reviewing existing or template exit clauses to identify opportunities for partial terminations, suspensions of services for defined periods or defined reasons, as well as any opportunities to mitigate risk by allowing termination if the arrangement becomes unviable. The risk of tariffs in your industry spring to mind as a particular opportunity here.  

In many situations, blanket termination clauses won’t provide the operational certainty you want, however. So, it’s important to be quite specific about how, when, and why the contract can be terminated.  

Renegotiation clause 

A renegotiation clause can be used as an early dispute resolution mechanism. These clauses require parties to attempt to renegotiate a contract in good faith to reach a new agreement, instead of defaulting to mediation or other dispute resolution mechanisms. They can be used in conjunction with termination clauses to manage risks, such as rising costs, significant market shifts, and supply chain disruptions. 

Indemnity clauses 

Indemnity clauses are a contractual agreement where one party agrees (the indemnitor) to compensate the other party (the indemnitee) for specified losses, damages, and liabilities that the other party may suffer. In other words, it’s a clause that shifts the financial burden of potential risks from one party to the other. We covered them in detail in an earlier post on Understanding Indemnification.  

Flexible pricing clauses to manage economic risk 

Inflation-linked pricing 

This mechanism can tie pricing to a specific economic indicator, such as the Consumer Price Index (CPI), or a custom index relevant to the industry. For example, a construction contract might tie material costs to the Producer Price Index for building materials. This mechanism provides automatic adjustments, removing (or at least reducing) the need for frequent renegotiation. 

Cost-sharing models 

In a cost-plus contract, the buyer agrees to pay the seller’s costs plus a specific profit margin. This approach can be attractive for projects with highly unpredictable costs. To manage the buyer’s risk, the contract can include a cap on total costs or a requirement for the seller to provide detailed cost breakdowns and justification. 

Volume-based discounts 

These are common in supply contracts. In an uncertain market, a buyer might be hesitant to commit to large volumes. The contract can offer tiered pricing based on volume, giving the buyer the flexibility to reduce orders without facing excessively high per-unit costs. This encourages the buyer to stick with the supplier, even if their demand changes. 

Performance-based pricing 

This model links payment to the achievement of specific goals or key performance indicators (KPIs). For example, a marketing agency might receive a bonus if a campaign achieves a certain return on investment. This aligns the incentives of both parties and can be particularly effective in service-based contracts where the value is tied to results rather than just time and materials. 

Recent risks that require modernized protections 

Supply chain disruption clauses 

For product-based businesses, supply chain management has become increasingly challenging over the past five years. Your contracts should have adapted to the dynamic supply chain environment.  

It’s crucial that your contracts cover what happens if your supplier cannot deliver goods – whether on time or in totality. It may be appropriate to include a requirement for the supplier to source materials from an alternative vendor (and to have that vendor identified in advance of any disruption), or a clause that allows you to buy the goods elsewhere, without penalty, if the disruption extends beyond a specific period of time.  

You can read our detailed coverage of supply chain contracts for more information.  

Service continuity provisions 

For service providers and tech companies, service continuity provisions are essential. These clauses should mandate that a provider has a robust disaster recovery plan and a business continuity plan. In particular, the plans should outline how the provider will maintain essential services or functionality if a cyberattack, system or infrastructure failure, or other significant disruption occurs.  

With these clauses, it’s important to consider proportionality. These terms could be quite important for, say, document management software or website hosting contracts (depending on what your company does). They may be less important, or even burdensome, for contractors providing website content or out-of-hours customer service. 

Clauses to protect revenue 

“Cash flow is king”, the adage goes. Your contracts can help to ensure you have a stream of revenue and protect against non-payment. Here are some key clauses that can help:  

• Advance payments/deposits, which secure a portion of the contract value upfront. This is particularly helpful for service providers and in certain industries, since the practice is more commonplace.  

• Escrow arrangements, which require a deposit of the payment into a third-party account until specific conditions are met. This can be mutually beneficial since it reduces the risk of non-payment for the seller and non-delivery for the buyer.  

• Late payment penalties encourage timely payment – especially when the penalty starts to accrue immediately after the payment is late. We commonly see fixed fee penalties, interest-based penalties, as well as staged penalties that get increasingly severe the later the payment is.  

Unfortunately, the best time to have included these key clauses in your contracts was before any period of economic turbulence. But it’s not too late if they aren’t already there. While your current contracts may not offer as much protection as you’d like, you should identify contracts that are due for renegotiation or outside of their original term and negotiate new ones. All new contracts should contain the key clauses outlined above. 

Contracts to Build an Agile Workforce 

Your workforce contracts may also warrant some review. In a more uncertain market, using a workforce with more independent contractors can be appealing. This gives you access to specialized skills for specific projects, without the longer-term commitment of full-time employees. Additionally, contractors are typically able to work independently (as the name suggests!) without too much oversight and management from your team members, so it frees up internal resources to focus on their priorities.  

But, there are significant risks that come with misclassifying employees as contractors, and it’s not a strategy we recommend. Simply calling a worker a contractor and having them sign an employment contract does not make them a contractor under the law.   

The risks of misclassification include significant penalties for violations, as well as liability for restitution, such as proper payment of wages and overtime, payment of unemployment insurance, back-taxes, penalties and interest, and payments for workers’ compensation insurance.  

You can read more on the specific risks about misclassifying employees, as well as California’s tests for classifying contractors on the DIR website and in our earlier blog post on the ABC test.  

Other Legal Considerations During Uncertain Periods 

Briefly, here are some other legal considerations during uncertain economic periods:  

Consider having your legal counsel attend your board meetings: This practice allows your legal counsel to understand your operations and challenges more deeply, and to provide strategic counsel in response.  

Intellectual property (IP) protection: It’s crucial to ensure your IP is properly protected, since it can provide certainty when other market factors become less predictable.  

Ensure you aren’t commingling personal and business funds: Separating personal funds from business funds is always essential, but it’s something that we find is regularly overlooked by founders. During more uncertain times, creditors can use more aggressive tactics and commingled funds can seriously reduce the protections of a separate legal entity for your business (either in an LLC, or other corporate entity).  

Exit strategies: Economic factors will always play a role in valuations. As a result, if you’re considering an exit in the near term, it’s more crucial than ever that your company’s legals are in order. We wrote about exit strategies in 2025 in detail earlier this year, covering everything from cap table hygiene to earnout structures.  

Regulatory compliance: Compliance can be burdensome, but so can regulatory enforcement when your business is already suffering due to uncertain economic conditions. Staying up to date and prioritizing compliance can pay dividends during periods of economic stress.   

Need help with your company’s commercial agreements? Reach out to CGL LLP. Our experienced team of attorneys are available to help. We offer flexible, scalable legal solutions to growing companies.  

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