What to do if – there are issues in your supply chain

Tariffs are the buzzword on everyone’s lips. The ripple effects of even the threat of tariffs is being felt up and down supply chains around the world as contracts suddenly become unaffordable due to increased prices, increased costs of materials, and falling demand. This article sets out how to avoid disputes in your supply chain in the first place, and then what to do if those issues do arise. 

Avoiding disputes starts at the very beginning when you are drafting the contract. Make sure you think about the kind of disputes that might arise in your particular supply chain relationship. For example, if drafting a contract now, you may want to include a clause that if tariffs reach a certain amount, the contract can be terminated. Think about including a conflict avoidance procedure so that if issues do arise, there is an agreed way to seek to resolve the dispute instead of one party simply defaulting. Alternatively, if you are dealing with other parties’ standard terms, read them carefully, and if you want to vary them at all, set that out in writing before acting upon the contract and get the other party to confirm in writing any amendments. 

Once the contracts have been entered into, or if you are already in a contractual relationship, review those contracts regularly, and maintain good record keeping. This will help you down the line if you want to terminate a contract, because you will have a patter of behaviour you can refer to. 

So what should you do if you are in such a supply chain and issues arise – you are unable to buy or sell what you promised, and / or another organisation in the chain is threatening to default on their obligations to you. This applies to anyone in a supply chain, whether you are the party unable to supply or purchase, or you are the party who can see issues up or down the chain and parties are threatening to default on you. 

Look at the contracts themselves and whether there are any clauses in there to help you. The starting point is that you usually have to perform your obligations, no matter what, and if you do not, you are in breach of the contract and the other side can sue you for damages. However there are some specific clauses that might help you, so when you first get an inkling of supply chain issues, look at your contracts up and down the chain for the following:

1. “Force majeure” clauses – this is a clause that says if a certain type of event happens, then the parties can terminate the contract or pause their obligations until the event has passed. Usually the events are events like war or natural disasters, but it will depend on the wording of the clause. Usually, mere economic issues, such as increased prices, won’t be enough. So, such a clause may not help if the issue is tariffs alone.
2. “Material adverse change” clauses – these clauses are aimed at addressing unforeseen events. The courts have traditionally interpreted these clauses quite narrowly, but it is still worth looking out for these clauses as depending on the wording, they might help.
3. “Time is of the essence” clauses – if there is a clause saying time is of the essence for performance, then this will stop a party from delaying their performance until uncertainty resolves.
4. Check which law applies – usually these clauses are found at the end of the contract and say the law of a specific country will apply to any dispute. You need to check these clauses in all the contracts you are part of, so both the contracts where you are buying and the contracts where you are selling, because the applicable law may be different. This means you / the other party might be able to get out of one contract but not the other.
5. Check for “exclusive supply” clauses – if your supplier is threatening to delay or default, are you able to get your supply from elsewhere, or are you bound to them?
6. Check for limitation and liquidated damages clauses – sometimes it may be more economical to default on your contract and pay the damages of doing so than to seek to continue the contract.
7. Consider whether remedies outside the contracts might help you – some countries recognise the concept of frustration where the contract is impossible to perform because of an outside event. In England, it is hard to use frustration, but it is worth considering.
8. Check for notice provisions – if you or the other side are going to try and end the contract, do you / they have to serve contractual notice? If you receive contractual notice, does the contract say what you have to do?

Review the correspondence between the parties to see if there have been amendments made to the contract. Get your legal team involved as early as possible (whether in house or external). Think about commercial solutions to the problem, and investigate those – for example, could you renegotiate the contract or seek alternative suppliers or consumers. If a party is experiencing solvency issues, rather than pursuing a legal route, other parties might want to flex the existing contractual arrangements rather than let a key supplier or customer fail. Pursue those solutions in tandem with any legal action you take. 

Finally, get organised:

• Consider enforcement if a party is threatening to default on their contract with you and whether they are worth pursuing or are an empty shell. Keep an eye out for solvency issues
• Collate documents and correspondence, and make sure those documents will not be deleted / destroyed
• Notify insurers
• Seek legal advice
• Take steps to mitigate your losses 

Ultimately, don't terminate or accept a termination without taking legal advice, and considering the ramifications on your other obligations under other contracts in the supply chain. 

Our team at Mills & Reeve has a wealth of experience in managing supply chain issues and disputes. For further information, please contact Sarah Jacobs. 

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