Covid-19 and Supply Chain Breach of Contracts | Who is accountable?
By: Chambersfield Economides Kranos
Who will be considered accountable for the losses, in the cases where suppliers are not able to meet customers’ order and delivery obligations, due to COVID-19 outburst?
This question is among the most important queries that suppliers and customers try to answer after the pandemic declaration by the World Health Organization (WHO) on 11th of March 2020.
Undoubtedly, the coronavirus pandemic impact on the global economy and supply chain, heavily disrupted all the business operations and created massive negative effects.
Innumerable trade contracts have been affected by the lock-downs, travel restrictions and factory shutdowns worldwide.
In addition, firms with insufficient product line diversification and companies that followed limited shortage inventory system policies, were among the ones mostly affected, since from the beginning of the pandemic they started to experience significant difficulties and losses of revenue due to inventory shortage.
As we all know, product distribution is highly dependable on the supply chain’s efficiency and effectiveness, especially when cross – border transactions are in place.
It is undeniable that the supply chain industry heavily supports the global GDP.
Therefore, many governments in their attempt to protect their local suppliers have issued thousands of force majeure certificates and notices. The force majeure certificates and notices were used as a defense strategy for local suppliers to be exempted or suspended from their contractual obligations towards overseas buyers, due to the unforeseen and unpredicted conditions that the pandemic caused.
Force Majeure principles describe the out of anyone’s control unexpected events that prevent contractual parties to fulfil their contract obligations i.e. natural disasters, pandemics etc.
Having said that, not every agreement is eligible to be valid under the force majeure doctrine since the clauses included in the contract and governing laws of each jurisdiction, differs.
Consequently, it is advisable, as a sound practice, that all contracts, no matter the nature of the transaction or agreement or jurisdiction, are drafted by experienced lawyers, so as to include the rights and obligations of all parties involved and state the actions that should be followed in the case of a dispute or contract failure.
Thus, lawyers not only will specify the contractual parties’ relationships in the occurrence of a dispute, but they will also add clauses that will specify:
• in which events force majeure actions will come into force
• which party will be responsible for the possible financial losses in each specific event
• the contract governing law
• in which cases is the resolution of the contract acceptable, with no further legal consequences other than the ones specified in the contract etc.
The risks of COVID-19 outburst lie on the inability of businesses to meet their contractual obligations in the event which, the business’ operations are being disturbed by the coronavirus pandemic or governmental restrictions.
Who is accountable for those losses? The supplier, The customer or Both.
Unfortunately, who is held responsible is at fault and who will bear the financial losses when a supplier cannot meet customers’ orders is not a straightforward answer.
In the event of a pandemic outbreak, suppliers should carefully assess their legal contracts clauses and determine which sections apply to the exact event and specify if the conditions stated in the contract provide solutions for this event.
Furthermore, suppliers should examine if the specific event is directly correlated with the cause of not meeting the contract obligations and then examine if the specific cause was the one that affected their performance.
Moreover, suppliers should determine if the force majeure principle can apply on the specific event and examine if the legal framework of the contract’s governing law justifies the reasoning of the force majeure for not meeting contract obligations.
To sum up, everything depends on the contract terms and conditions, as well as the governing law of the contract, since there is no global one-size fits approach for countries.
What is more, suppliers may put into effect additional strategies that will assist them to minimize the consequences of the outbreak and cope with the risks caused by the pandemic.
Suppliers Crisis Management
First and foremost, suppliers should try to negotiate with customers directly and try to identify, as well as suggest possible ways of solving the problems in the supply chain.
Some “relief strategies” that suppliers may adopt are:
• prolonging the lead delivery time to customers
• prioritizing orders according to delivery time requirements per contract
• postponing new incoming orders or extending the proposed delivery time
• allowing cancellations for a short period of time etc.
Second, suppliers should form a crisis management plan that will include amongst others:
- • Identification of the problem and analysis of all the reasons that are affecting the supply chain’s performance (i.e. lock-downs, travel restrictions, quarantine, staff illness, governmental restrictions etc.) It is extremely important for suppliers to document all the reasonings and determine which whys disturb the supply chain’s flow and how those causes affect the supply chain’s performance at all levels, so as to be able to proceed with the correct management decisions and avoid contracts terminations and minimize financial losses.
• Recognition and legal analysis of the risks involved, in accordance with the contract clauses and contacts governing law.
• The formation of outsourcing agreements with affiliate suppliers situated in operational areas, not heavily affected from the pandemic. With this “mitigating risk strategy”, suppliers may be able to support their production and overcome the supply chain problem for a short period of time.
Third, when suppliers have exclusivity contracts with customers, it is highly recommended to review those contracts with great caution with their legal associates and give emphasis to the clauses of delays, delivery failure, force majeure, reasons for contract termination etc.
Last but not least, suppliers in cooperation with their legal associates should review very carefully the dispute resolution section of their contract with customers and/or affiliates, so as to determine their legal rights and be in the position to negotiate.
- Supply chains are amongst the most vital, complicated thus advanced industries of the world that allow minimum delays and disruptions, due to cost and inventory optimization policies by the companies.
- Serious disturbances, i.e. coronavirus pandemic, may result to massive losses around the globe and serve as a tricker point of a global economic recession.
- Therefore, suppliers by acknowledging the vulnerability of the supply chain industry should seek the consultation of legal and business consultants to assist them in forming a crisis management plan that will include reasonable solutions with immediate enforcement, so as to safeguard their companies’ operations and future.