Shared & Halved – IHL series: Supply issues

As part of our series of webinars to support in-house lawyers during the current pandemic, on 24 April we hosted a webinar looking at the impact on supply chains, specifically the pitfalls associated with supply issues, force majeure, payment issues and practical steps for dealing with supply chain fallout.

Introduction

The IHL series of our COVID-19 webinar programme covers bite-size topics designed for a half hour coffee break and focuses on practical tips for in-house lawyers.

This was our third session and focused on supply issues. The webinar recording and the key takeaway points are set out below:

Key practical issues in supply contracts:

• Prioritising your contracts is vital: look at your key contracts and, in particular, any force majeure provisions
• This means triaging, particularly if you have hundreds or thousands of contracts

What about force majeure?

• Force majeure isn’t implied in English law
• The result? Before doing anything else, look at the relevant contract to work out your options. Every contract is different
• Don’t forget:

• just because there’s a force majeure clause, this doesn’t necessarily mean that a force majeure event has happened. The wording in the contract is key
• you need to typically prove that the force majeure event is preventing or hindering performance. If you can, this typically means suspension or termination of the contract. Again, the wording in the contract is key
• check the procedure in the force majeure clause for giving notice

What about frustration?

• If force majeure isn’t available, frustration is seen as the ‘next best thing’
• However, the bar for frustration is high. Just because a relationship is now too complicated or onerous doesn’t mean that frustration is available
• Typically frustration tends to be more helpful in a simple contractual relationship (such as the provision of one service at a certain time) as opposed to a complicated set of contractual arrangements
• Bear in mind that if you claim a contract has been frustrated and you’re wrong, you may be in breach of the contract (having terminated it) and the other party could claim damages

Have you checked your insurance?

• Bear in mind that although your insurance may not cover epidemics or pandemics, it may cover acts of government. If you are covered or think you are, contact your insurers ASAP

What are some businesses getting wrong?

• A force majeure clause will not necessarily help just because a relationship is now less profitable or more expensive (unless the wording is clear on this)
• Obligations under a force majeure clause will not necessarily be the same as the other parties’. Often the parties’ rights and obligations differ
• ‘Be careful what you wish for’: starting the clock ticking on a force majeure clause may result in the termination of a contract that the parties don’t actually want to terminate
• Bear in mind that the courts typically won’t step in to fill in any blanks in the contract

Do you have to pay for services you aren’t receiving?

• As always, look at the relevant contract to work out your options
• Your options may depend on whether, say, you pay an annual fee or specifically for services delivered

Have supplier disputes increased?

• People certainly want to know their rights but currently our analysis is that litigation is proving to be a step too far for many businesses
• Cash-flow preservation at the moment is vital and creative solutions are helping businesses to deal with the crisis, such as leveraging government support (e.g., furloughing)

What if the restrictions change (such as on social distancing) and this has a cost?

• As mentioned, just because a relationship is now less profitable or more expensive doesn’t typically mean you can claim under a force majeure clause
• However, if the contract is not, for example, a fixed-price, you may have more leeway

What approach should in-house lawyers take generally?

• No business is escaping the impact of the coronavirus. Be commercial and pragmatic, and keep your relationships going so when the worst of this is over, you can hit the ground running
• Think creatively but ensure that any solutions are properly documented
• Remember that this will come to an end: keep talking to your customers, suppliers and key stakeholders