Supply Chain Disruption
A significant degree of supply chain disruption is fast becoming normality in the UK, with a combination of Brexit and the Coronavirus pandemic leading to challenges in bringing goods in and out of the country, moving goods around, and staffing businesses in general in light of COVID. Businesses and consumers alike are becoming accustomed to being unable to obtain goods as quickly or easily as they might have done pre-pandemic.
It is increasingly apparent that some of these issues, such as the shortage of HGV drivers in the UK, are longer-term problems that are likely to take months or years to deal with, despite recent efforts by the Government including improving access to testing and relaxing immigration requirements for European HGV drivers.
With that in mind, businesses need to consider, when putting new contracts in place, how their contract might protect them against supply chain issues. In addition, businesses should have an awareness of the tools available to them in their existing contracts if and when these issues arise, whether on the supplier or customer side.
A good place to start when looking at any contract is the key obligations under a contract; that is, what is the supplier supplying, and what is the customer paying? Contractual obligations around supply and delivery can be used to transfer risk from one party to another. For example, does the supplier commit to delivery on a specific day? Is the supplier responsible for import / export formalities? Is the supplier obliged to accept any order placed under a framework agreement, or do they have the ability to reject an order they do not think they will be able to fulfil? These are all areas where supply chain disruption might make performance more difficult, so pay close attention to who is responsible for them.
As a supplier, if you are concerned about your ability to perform a given obligation, consider incorporating a “reasonable endeavours” or “best endeavours” obligation. These types of provisions incorporate a degree of flexibility, allowing a contract party to put differing degrees of effort into performance, and in the case of “reasonable endeavours” to take its own commercial considerations into account to varying degrees.
From the customer’s side of things, are you committed to purchasing certain volumes? Can you flex your commitment based on changing requirements?
How do the payment provisions protect your business? If you are a customer agreeing to provide payment in advance, do you have sufficient confidence that the supplier will be able to deliver? If not, you might consider insisting that at least a portion of the payment is held over to completion of the work or delivery of the goods. Alternatively, if you are a supplier agreeing to 30/60/90 day payment terms, are you confident that the customer will pay, or is it worth insisting on full or part payment in advance? Consider also the possibility of parent company guarantees or other security if you have concerns about the counterparty’s ability to perform or pay.
Another aspect to consider, as a supplier, is to retain ownership in goods until payment has been received. A well-drafted retention of title provision can enable a supplier to recover goods from an insolvent customer, rather than merely being an unsecured creditor in the insolvency and thus recovering a percentage of the money owed. Conversely, customers paying in advance could consider having ownership transferred to them as soon as they make payment, for similar reasons.
Other contractual mechanisms can protect parties when things go wrong; a key provision is the force majeure clause. This can relieve a party when an outside influence prevents them from meeting their contractual obligations.
Be aware that force majeure does not have a fixed meaning, as it is used to mean different things in different contracts, so you need to check what your specific contract defines it as. This may be a wide “everything outside a party’s reasonable control”, or a more specific list of events, in which case you would need to consider whether the situation you are looking at falls within the events listed. You should also check whether the clause specifically only covers events that were unforeseen. It may be difficult to argue that the supply chain challenges resulting from Coronavirus and Brexit were unforeseeable for contracts entered into more recently.
In the absence of a force majeure clause, there is still the option of claiming frustration. This applies where an event is so fundamental as to be regarded as striking at the root of the contract and being entirely beyond what was contemplated by the parties when they entered into the contract, and that renders further performance impossible, illegal or radically different from what was contemplated. This is a very high bar to be met and it is very rare that a frustration claim is successful, so it is very much a measure of last resort.
Ultimately, if supply chain problems are proving to be too disruptive to the performance of a contract, you may want to be able to terminate. You may be able to rely on a material breach provision, or your force majeure clause may include a termination right for prolonged disruption. Consider up front whether there are certain other circumstances in which you might want a right to terminate, for example if certain service levels or KPIs are persistently not met.
Contracts also typically include a provision allowing a party to terminate for the other party’s insolvency. Bear in mind that, as a supplier, even if your contract says that you can terminate the contract for your customer’s insolvency, you are only permitted to do so in limited circumstances, following the introduction of the Corporate Insolvency and Governance Act in 2020, and you should be very cautious if terminating a contract with a customer in insolvency.
Outside of the contract
Of course, contractual mechanisms are not the only way that businesses can protect themselves when problems arise. Pre-contract, due diligence such as credit checking or examining company accounts is important and can help make sure that your counterparty is likely to be able to meet their obligations. Post-contract when things go wrong, having a good relationship with your customer or supplier will stand you in good stead. Often an amicable resolution to a dispute can lead to a better result for your business and will avoid the time and costs involved in formal disputes.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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