Supply chains are becoming more fragile and sensitive in the wake of the Russian invasion of Ukraine. Regrettably, commentators are predicting that things are likely to get worse for hundreds of thousands of businesses around the world.
What are the legal implications of a supply chain emergency?
Customers and suppliers are becoming increasingly frustrated by the inability to fulfil supply chain obligations. Unforeseen global events such as the pandemic and the recent crisis in Ukraine have only added to the existing supply chain impacts of Brexit, driver shortages, revised border controls, and changing customs regulations.
Supply chain issues go much further than delivery problems. In some sectors, excessive demand for microchips and the increasing price of raw materials is contributing to the problem.
Why is the supply contract so important?
Supply chain disruption inevitably causes distress for both suppliers and customers. Pressure is put on the commercial relationship and in the worst case, can end in a legal dispute. The supply contract helps suppliers understand the extent of their liability and will inform customers of their rights.
How can a well-drafted supply contract help?
Suppliers need to consider how their delivery obligations are expressed in their contracts. Are these tightly defined, or do they allow for some flexibility? Does the contract’s “force majeure” clause support the supplier’s claim that delivery obligations should be ended or at least suspended due to events out of its control?
Where claims for delays are brought against a supplier by customers, there may be an insurance policy to cover such action. Alternatively, where a third party is to blame, the supplier could check whether there is a form of redress in the agreement with that third party.
What action should you take to resolve a supply chain dispute?
When a dispute arises, taking legal action is unlikely to be the most effective first step. Threats of legal action tend to make parties dig their heels in and can introduce costs, at odds with good supply chain management.
Better communication and sensible dialogue are usually a more beneficial approach to supply chain issues between parties and can help manage expectations. Suppliers are wise to notify customers as early as possible about delivery delays or product shortages. Then if a legal dispute does arise, courts may look favourably on parties who have tried to resolve their problem themselves and minimise their losses.
What can you do to mitigate supply chain risk?
Many businesses have been struggling financially over the past two years and a supplier facing insolvency can put enormous stress on the supply chain. This issue highlights the need for thorough due diligence to check on the financial health of a company before engaging them.
In contracts with manufacturers, consider insisting that ownership of goods passes to the customer upon manufacture rather than delivery, so that those items can be protected if the insolvent business’s assets are sold off.
Whilst most contracts may be terminated by customers in the event of a supplier’s insolvency, a statutory “moratorium” (temporary prohibition) does restrict customers from taking certain actions, (including legal proceedings) against a distressed supplier without court permission or the consent of the administrator.
A good customer will explore potential avenues to secure future supplies and may even consider purchasing the supplier to maintain continuity.
Why you should review your supply chain contracts
Recent global events have highlighted the fragility of modern supply chains. Supply chains need to flex and adapt to prevailing conditions, and this includes reviewing the commercial contracts that support these trading relationships to fully consider current and future risks.
3CS is here to help
If you need help to review or draft commercial contracts, we are here to support you. Please get in touch with your usual 3CS contact for more information.