Supply chains frequently consist of and depend on contracts between parties in different countries and/or who operate at different stages of the production process. The ability to perform these contracts is therefore exposed to a wide range of legal, political, and geographical risks. Accordingly, it is important for parties to consider whether their contracts offer adequate protection. Mikhail Vishnyakov, Partner, and Gin Kynigos, Junior Associate at Cooke, Young & Keidan LLP outline the key contractual mechanisms that may be available.
Termination rights
Express termination rights
Contracts can specify the grounds on which they may be terminated. Care should be taken in identifying these grounds with precision. By way of example, termination is usually permitted after a “material breach”. If this is not defined/explained in the contract, it may be difficult to assess whether any breach (or series of breaches) is “material”.
If relying on express termination rights, care should be exercised because the consequences of a mistaken reliance on the termination clause can be severe and can expose the terminating party to damages claims and breach of contract allegations (as wrongful termination can itself be deemed a breach of contract).
Common law termination rights
Even in the absence of express termination rights, the common law gives parties the right to terminate a contract on grounds of the most serious breach (a repudiatory breach). Clear wording is required to exclude the common law right to terminate for breach.
If a repudiatory breach is committed, or if an express termination right is triggered, a party may be legally required to quickly decide whether to “affirm” the contract, or treat it is as terminated.
Force majeure clauses
SMEs should review existing contracts to determine if a force majeure clause is included and what specific events it covers. If the disruption falls under the clause, the business may have legal grounds to delay or terminate its contractual obligations. When entering new contracts, SMEs should negotiate clear and comprehensive force majeure clauses that clearly define qualifying events, such as cyberattacks or pandemics. Subsequent legal restrictions (such as sanctions) are also frequently included as force majeure events.
Businesses must be cautious about invoking force majeure clauses as wrongfully invoking such clauses can lead to disputes, including wrongful termination or breach of contract. Even when a force majeure event occurs, businesses invoking the clause are often required to use “reasonable endeavours” to overcome the disruption and/or mitigate its impact.
Importantly, English law recognises “force majeure” only if that concept is expressly addressed in the contract. If the contract is silent in this regard, a party may be able to rely on the doctrine of frustration if the contract has become impossible to perform (albeit the threshold for this is high).
Breach of contract
If a contract is not complied with (for example, if a supplier fails to deliver goods or services), this may constitute a breach of contract. The process of claiming damages however is not straightforward and SMEs should be aware of important principles such as mitigation – the obligation to take reasonable steps to minimise the loss resulting from the breach – and limitations on damages, such as foreseeability and remoteness, which can reduce the amount of damages recoverable.
Comments
In the event of a supply chain dispute, time is typically of the essence, often due to the characteristics of the relationship (for example, if it involves dealings with perishable goods or in volatile markets), or because the applicable legal principles require quick actions. Accordingly, businesses should consider taking legal advice promptly once they suspect that a dispute may be on the cards.