In recent years, almost all sectors have in some way suffered from the global supply chain crisis, but perhaps none more so than the food and agricultural sector. From delayed deliveries, to higher prices, to empty shelves in supermarkets, vulnerabilities in the supply chain have rarely been out of the press.
Whether the cause is Brexit, the pandemic, crop failures, labour shortages, the War in Ukraine, resulting energy price increases, or any combination of those factors, the impact on businesses has been significant and disruption is likely to continue for some time.
This blog post considers some of the practical steps to take if your business becomes affected by disruption in the supply chain. What happens, for example, if your supplier starts providing products late? Or not enough? Or not at all?
Always check the contract(s)
Every supply chain, and the contracts that underpin them, will be different.Early legal advice is often hugely beneficial when seeking to understand your rights and obligations, as the position is rarely straightforward. Check your contract for the following provisions:
- Governing law - often supply chains have an international element so, first and foremost, check what law governs the contract. If the contract is governed by the law of another jurisdiction, then the legal position may be very different.
- Contractual remedies - what does the contract say about timing of deliveries and quantities of products? Does the contract set out the specific consequences of late or failed deliveries?
- Force majeure – this clause typically excludes the parties from performance of the contract following the occurrence of certain acts, events or circumstances beyond the control of the parties, for example, natural disasters or wars.
- Limitations or exclusions – these clauses often serve to limit or exclude the supplier’s liability in certain circumstances.
- Hardship – a clause which permits the supplier to renegotiate the price in the event of a significant increase in costs.
- Termination - in the most serious cases, is there a contractual right to terminate?
Consider insolvency aspects
The position becomes more complicated when a party in the supply chain is at risk of becoming insolvent. In those cases, customers can quickly find themselves out of pocket and/or unable to secure the products they need.
Keep an eye out for any signals that a party in your supply chain is having solvency issues – for example, longer lead times for payments or pressure to pay invoices, any information contained in corporate filings, or speculation in the market about a party’s credit worthiness.
Sometimes, rather than pursuing a legal route, the other parties in the chain may want to take a pragmatic approach and consider whether it would be preferable to flex the existing contractual arrangements rather than to let a key supplier or customer fail.
You may also want to think about what additional contractual protections your business might have. For example:
- if your business has supplied goods to the insolvent company, does the contract contain a retention of title (ROT) clause? ROT clauses typically provide that title to the goods is retained by the seller until the customer has paid for them, which means you may be able to re-possess the goods and re-sell them. Of course, if the goods are perishable then a ROT clause may be of little practical assistance – your ability to re-sell the goods may be limited; and
- does the contract allow your business to withhold future deliveries in the event of non-payment? You will need to check the detail of the contract to understand the basis on which deliveries can be withheld.
Where a company enters a formal insolvency process (typically administration or liquidation) then other considerations will arise. Early engagement with the insolvency practitioner is often key to understanding likely next steps and options.
Consider practical solutions/alternatives
There may very well have been a breach of contract by your counterparty, which entitles your business to compensation or to terminate the contract. That doesn’t, however, help you to deal with the situation in the moment. Realistically, you’ll want to consider more practical steps - for example, whether there are any alternative suppliers that you could use to ensure that production and onward supply can continue.
In practice, your company’s legal rights may provide you with leverage to exert pressure on other parties to start performing their contractual obligations, or to enter negotiations to reach a commercial resolution. In negotiations:
- Use “Without Prejudice” - if you are attempting to settle the dispute, make sure any negotiations and/or offers are stated to be “without prejudice.” This will generally prevent those statements from being put before the court as evidence of admissions if settlement cannot be reached, and so it allows the parties to deal more openly with each other when seeking to agree a settlement.
- Be clear about what is (and is not) legally binding – for example, if you are letting the other party stray from their contractual obligations, make sure it’s clear if this is a time limited or one-off arrangement.
Other practical steps
In the early stages, it’s critical to think about protecting your position and giving yourself a competitive advantage should matters escalate.
In terms of practical steps:
- Be careful what you put in writing – making concessions or admissions could affect your legal position later down the line.
- Speak up about potential breaches and keep a record of them – if you say nothing you may risk waiving your rights to claim. Contemporaneous records of breaches and losses suffered can provide helpful evidence if needed at a later stage.
- Ensure that all existing relevant records and communications are retained – again these documents may become important if a dispute escalates.
- Comply with your own obligations (where possible) and take steps to minimise losses – parties will not be entitled to recover losses that they could/should have taken steps to prevent. Keep this in mind when considering practical alternatives.
- Don’t run out of time - some contacts contain specific deadlines for notifying of claims, commencing proceedings, or taking other actions – make sure you don’t let them pass.
Mills & Reeve have significant experience advising suppliers and customers operating within the food and agricultural sector – if you need any advice in this area then please do contact us.
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