Preventing supply chain disputes

Mar 28, 2022

Australians are finally enjoying some relief from Covid-19 social restrictions, but major disruptions to supply chains across the globe continue.

Since late 2019 we have seen the pandemic cause disruptions across a vast range of supply chains, from major supermarkets running out of stock, extensive shipping delays, through to businesses being shut and operating on skeleton staff. The war in Ukraine and the resulting trade sanctions have had an immediate impact on global logistics and transport costs, further exacerbating the pressure on already strained global supply chains.

This global uncertainty will inevitably result in contractual disputes between manufacturers, suppliers and retailers as businesses seek to prevent further losses.

Businesses at all levels of the supply chain need to carefully consider the following key issues when entering into new (or renew existing) supply contracts.

Understanding rights of termination and when they can be exercised

At the outset, it is important that businesses turn their minds to whether a supply contract may be terminated in the event that issues in the supply chain arise.

Before seeking to rely on a right of termination, businesses need to carefully consider the nature of the breach that they are seeking to rely on in the context of the contract as a whole. For example, termination on the grounds of the counterparty’s failure to perform an obligation under the contract needs to be considered against the specified timing for performance as set out in the contract.

In addition, seeking to terminate a contract where a clear right of termination cannot be established can result in the terminating party being found to have wrongfully sought to terminate the agreement which could allow the other party to terminate and make a claim..

Conversely, failing to exercise a right of termination promptly when it arises may be seen as affirming the conduct of the breaching party, which can in turn prevent the non-breaching party from exercising any rights of termination at a later time.

Force majeure clauses

Force majeure clauses specify that the occurrence of an unavoidable or unforeseeable event (such as a pandemic, natural disaster, or an act of war) will temporarily relieve a party from performing certain contractual obligations.
Carefully drafted force majeure clauses can enable the parties to a contract to preserve the contractual relationship when unforeseeable events occur which result in a party being unable to perform their obligations under the contract.

However, a party seeking to rely on a force majeure clause must carefully consider the specific circumstances which allow for the suspension of their contractual obligations. More information about the key considerations for interpreting force majeure clauses can be found here.

Price review clause

Suppliers and manufacturers need to ensure that the terms of their supply contracts contemplate increases to materials and manufacturing costs, particularly where price increases occur as a result of circumstances outside of the manufacturers/suppliers control.

Price review clauses need to be clearly drafted in order to be effective, and also need to be drafted in a manner that cannot be seen as unconscionable.

Where a dispute or disagreement around a price review or increase arises, the terms of the relevant supply contract need to provide a clear and workable mechanism for the dispute to be negotiated and resolved in a manner that will mitigate any disruption to business operations.

Consequential losses

Businesses need to understand their liability for consequential losses in the event that they are unable to fulfil their contractual obligations due to circumstances outside of their control.

In addition, where your businesses’ downstream contractual obligations may be impacted by delays higher up the supply chain, you should be aware of your rights to recover any consequential losses suffered.

Where particular losses as a result of supply chain issues are foreseeable, the terms of your supply contract should clearly state the nature of any losses which your business might seek to recover.

Conversely, businesses should ensure that supply contracts include appropriate safeguards and limitations of liability for any consequential losses which other parties may suffer in the event that unexpected delays occur.

We’re here to help

If you have any questions about the terms of your existing supply contracts or are looking to enter into a new supply contract, the KKI commercial team are here to help.