Supply chain delays and the reasonableness of risk-sharing

Supply chain delays and the reasonableness of risk-sharing

Key Contact: Cristina Benezet

Earlier this year, research conducted by Chartered Institute of Procurement & Supply found new Brexit customs requirements and extra Covid-19 protocols were the primary causes of delays for many firms based in GB importing goods from the EU. An increase in customs paperwork, the introduction of new taxes and tariffs, a lack of capacity among customs staff, and drivers being turned away for presenting the wrong paperwork at the EU-GB border were found to be some of the main reasons for delays.

This month, post-Brexit checks on some EU goods coming into GB have been delayed by the government in order to give businesses more time to prepare. Whilst this may ease pressure on certain food supply chains, it falls short of resolving the unpredictable delays faced by many British distributors and manufacturers, inevitably placing more and more pressure on GB’s supply chains, making it more difficult to maintain healthy supplier-purchaser relationships within GB.    

Many distributors and manufacturers in GB rely heavily on EU imported goods in order to conduct their business and fulfill their clients’ requirements, whether these clients are end-users or suppliers themselves. The risk of delayed goods can have serious financial consequences on supply chains, and there is a question as to how financial risk should be shared amongst the parties in the fairest and least market damaging way. One would have thought that it is unreasonable to expect one single supplier importing goods to bear alone the risk of loss sustained within an entire supply chain, particularly when this risk is arising from circumstances beyond its control. Fortunately, suppliers have the option of transferring part of their risk down the supply chain, via proper negotiation of certain clauses within their contracts.

“Time of the essence”

“Time of the essence” is a concept often introduced into contracts by purchasers which require delivery of goods by a specific deadline in order to fulfil their own obligations or demands.  The consequences of breach of a “time of the essence” clause can be quite onerous for a supplier of goods, as it gives the purchaser a right to terminate the contract and sue the supplier for contractual damages, including the potential loss of profits from not having the merchandise on time. For this reason, a supplier of goods will always want to resist the expression of “time of the essence” within its contract. Furthermore, a stipulation in a contract as to time for performance of an obligation may be construed as being of the essence even if it is not expressly stated as such and the supplier may therefore want to expressly state within its contract that any times for performance are estimates only and will not be of the essence. A similar effect may be achieved by a supplier adopting expressions such as the use of “reasonable endeavours”, “all reasonable endeavours” or “best endeavours” to deliver goods by certain dates. These expressions may in addition exonerate a supplier from payment of service charges, often imposed by purchasers as a deterrent against late performance by suppliers.

“Force Majeure”

The purpose of a force majeure clause is to excuse a party from performance of the contract following the occurrence of an event beyond its reasonable control, which has hindered the performance of the contract or made it impossible. Such a clause will also determine whether the contract continues, is suspended, or is terminated by either party if the force majeure event continues beyond a certain period. This can be a useful mechanism to redress the balance of risk amongst the parties so that each party bears its own risk of loss arising as a result of a force majeure event.

Whether a force majeure clause will be triggered by Brexit or Covid-19 related events impacting on the delivery of goods will depend on the exact drafting of the provision and the application of rules of contract interpretation. A force majeure clause could, for example, describe some sort of supervening event beyond the control of the parties with consequences which may be factual (such as a pandemic causing staff to be ill and unable to work) or legal (such as restrictions imposed in reaction to a pandemic or new governmental laws, guidance, and regulations, which might burden and delay traffic across the borders), and which may affect the performance of a contract.

A supplier may want to ensure that a force majeure clause is drafted in a way that provides full certainty as to which circumstances constitute a force majeure event and in a way in which it does not exclude foreseeable events. Otherwise, the performing party could seek to rely on the foreseeability of pre-existing force majeure events in order to exclude those from the contract.  

In addition, regard is to be given to any post-contractual choices which could have been made along the way by a supplier to avoid or mitigate the supervening event or its consequences.  For example, if the non-performing supplier has not complied with government guidance or other good practice, then that may debar that party from relying on force majeure.

Conclusion

In this ever-changing globalised economy, reliance on international trade is paramount and cross-border disturbances can really shake internal markets, applying additional pressure in supply chains, putting some companies’ financial viability at risk, and causing others to shape and partly or fully relocate their business abroad. Redressing risk unbalances within supply chains can help towards ensuring that medium and small companies stay local and in business through times of market turbulence. Contracts offer the parties an opportunity to negotiate and distribute risk in a way that is fair and reasonable for all parties involved.

For further information and assistance on how you can protect your business from potential liabilities, please contact our Commercial and Technology Team.

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