In a world of increasingly long, international and interdependent supply chains, the coronavirus COVID-19 outbreak is just the most recent event to highlight the ever more complex considerations arising from a disruption to supply.

In the table below are examples of some of the more common questions we are asked when supply chain disruption occurs – both from a customer and a supplier perspective. The final row in the table recognises that in many cases the affected party is both a supplier and a customer.

Whilst the table is necessarily generic and not intended to be exhaustive, it exemplifies the potentially very large list of legal issues which often need to be considered by suppliers and customers in these circumstances (and upon which we regularly advise). Importantly, the table highlights there are still some very important legal considerations that are critical to consider even if (as is often the case) the best/preferred way to resolve a disruption in supply starts not by recourse to the contract but instead, to commercial/relationship based discussions between the respective parties.

Consideration

Customer perspective

Supplier perspective

Negotiation 
  • I think I can sort this out on a commercial/relationship basis with my supplier.  So why do I need to care about what the contract says or any legal issues and why should I be very worried about:
    1. accidentally waiving rights via negotiation?
    2. accidentally varying contracts by negotiation or simple changes to the way they are performed?
    3. not documenting any interim agreements reached with my Supplier (at all or as my contract requires)?
    4. what happens if negotiations break down?
  • I think I can sort this out on a commercial/relationship basis with my customer. So why do I need to care about what the contract says or any legal advice? 
  • When will documenting any interim agreement with my customer suit me and when would it suit me to resist this?
  • How can I turn what may be a problem for me into an opportunity for me?

Force majeure 
  • Can my supplier claim it in the circumstances?
  • How do I access the information to verify if the force majeure has occurred?
  • How long must it persist before I have a remedy?
  • Does it have to persist continuously or in aggregate?
  • What are my rights and remedies?
  • What if termination isn't the remedy I want/isn't practicable?
  • Does the contract and the circumstances let me claim force majeure (including what happens if the contract doesn't mention force majeure)?
  • How do I notify my customer that I am claiming force majeure?
  • What if my customer asks for proof?
  • Can I lose the right to claim force majeure?
  • What do I have to do to preserve a force majeure claim after I have notified the customer of it?

Frustration
  • Can I or my supplier claim it in the circumstances?
  • How is it different to force majeure?
  • What are the consequences of frustration – and will they suit me?
  • Does the contract and the circumstances let me claim force majeure (including what happens if the contract doesn't mention frustration)?
  • How do I notify my customer that I am claiming frustration?
  • What if my customer asks for proof of the frustration?

Most favoured/preferred customer
  • Can I rely on the clause I have in my contract in the circumstances?
  • How do I ensure that my supplier is complying in accordance with it?
  • Have I got any contracts in which I prefer any customers over others?
  • How do I allocate my goods/services in accordance with them?
  • Are my obligations affected by force majeure, frustration or any other defence?

Exclusivity and alternative supply
  • If I have an exclusive supply arrangement and my supplier claims force majeure or any other defence to non-supply, can I get my goods/services elsewhere without being in breach?
  • If an alternative provider would need information (eg. IPR, confidential information, data) from my supplier, can I compel the supplier to provide it to a third party?
  • Can I hold my customers to exclusive supply agreements when I am claiming force majeure, frustration or any other defence?
  • Can I refuse to let an alternative supplier have information (eg. IPR, confidential information, data) owned by me but needed to supply alternative goods/services for my customer?

Liability
  • What is my supplier's potential liability to me under my contract (including whether the supplier can rely on any liability caps and/or liability exclusions)?
  • When and how should I make my claim so that it is maximised but the impact on the relationship is minimised?
  • What is my potential liability to my customer under my contract (including whether the supplier can rely on any liability caps and/or liability exclusions)?
  • How can I mitigate it?
  • What should I be doing to preserve my relationship with my customer even though they may have a claim against me?

Liquidated damages
  • Can I claim LDs (and what if the contract doesn't mention them)?
  • When do they start and finish accruing?
  • How are they calculated?
  • Are they an exclusive remedy – and what does this actually mean?
  • Am I exposed to LDs?
  • Can I rely on any defences such as force majeure, frustration, dependencies on my customer?
  • When do they start and finish accruing?
  • Are they an exclusive remedy – and what does this actually mean?

Time of the essence
  • What does this entitle me to?
  • What if the contract doesn't mention it?
  • What if termination isn't the remedy I want/isn't practicable?
  • Am I subject to a time of the essence clause?
  • If the contract is silent could one be imposed on me by my customer?

Termination
  • If termination is a desirable outcome, of all my claims which one(s) is/are the best to pursue?
  • What if termination isn't the remedy I want/isn't practicable?
  • Can the Supplier contrive a termination when I don't want one?
  • Does my customer have an ability to terminate our contract?
  • If so, what responses are available to me?
  • What if I want to terminate our contract but my customer does not? Are any mechanisms available to me to do this (including are common law remedies available to me)?

Governing law, jurisdiction and enforcement
  • How concerned should I be about the governing law of my contract?
  • How concerned should I be about the country in which my supplier is located and how the law works there?
  • How concerned should I be about the governing law of my contract?
  • How concerned should I be about the country in which my customer is located and how the law works there?

Onward supply
  • I am both a customer of my supplier but also a supplier to my customers. So:
    1. how do I balance the competing considerations?
    2. what protections have I got in place with my customers so I can "back-to-back" potential exposure?

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.