Conversations about money issues can be difficult, no matter where in the supply chain a company sits. They can cause tension among contractual relationships, and potentially lead to disputes arising, but they are also essential. So, how can businesses resolve any disputes that occur without having to go to court?  

There are several clauses which businesses may consider invoking if they find themselves struggling to cope financially. Arguably the most relevant at this time is force majeure, which excuses one or both parties from carrying out their obligations in some way, due to a disrupting event making it impossible to function normally. However, if the other party finds a counter argument, this could lead to a costly dispute and cause issues for both the parties involved, as well as those further down the supply chain.

Thankfully, there is the option of taking a good faith approach instead. This can be a wise move for supply chain professionals, allowing a way forward to be negotiated, not argued.

Currently, every business is under the same strain, creating a rare opportunity for mutual understanding. By being transparent about their own situations, those in the supply chain can work together to find a practical solution to the problems they are facing.

Dispute resolution clauses are common in supply chain contracts, although not universal. Even POs for commodity and small-volume purchases often include dispute resolution clauses. A dispute resolution clause typically describes (a) the mechanism through which disputes will be resolved (generally litigation or arbitration), (b) the geographic location in which legal proceedings will take place, and (c) the law that will apply. Sometimes, a dispute resolution clause also specifies (d) any steps the parties must take prior to initiating a dispute, typically a negotiating protocol or mediation; (e) confidentiality; (f) any limitation on damages that may be awarded; (g) any special rules governing the presentation of evidence or discovery; (h) time limits; (i) whether “expedited relief” is available in case of A force majeure ; and (j) whether appellate review is allowed

New cosideration to avoid supply chain disputes with Covid 19 as A force majeure

Conflict avoidance

Where matters arise on site during the period in which national pandemic mitigation measures apply, which either party feel could escalate to a become a dispute, they should look at implementing an appropriate conflict avoidance procedure to seek to “head off” such issues in order to maintain site progress and regular cashflow, New cosiderations must be placed into account as follows:

Key considerations for buyers:

• Narrowly limit force majeure events to matters that are truly outside of the seller’s control, for instance excluding strikes, labour issues, or anything involving the seller’s workforce.
• Do not include tariffs, government embargoes or acts of government among the enumerated events, and consider including an additional protection that prices are inclusive of “all costs, including taxes, imports, duties, and tariffs”.
• Revise language that would allow the seller to claim that anything not explicitly listed that prevents performance is a force majeure event.
• Require prompt notice of any force majeure event, to allow for immediate evaluation of the supply chain impact.
• Include a clause that allows the buyer to exit the supply agreement if the seller is not able to resume performance within a certain period of time.

Key considerations for sellers:

• Negotiate as broad a list of force majeure events as possible, such as labour issues, equipment breakdowns, raw material shortages, etc.
• List specific risks like epidemics, pandemics, quarantines, acts of government, and government travel bans.
• Seek to include broad catch-all language for foreseeable or unforeseeable circumstances beyond its reasonable control that prevent performance.
• Strictly adhere to the notice period amid any disruption or potential disruption.
• Consider what the buyer’s rights are when exercising force majeure, for instance whether they are a mechanism for suspending performance under the contract, or for demanding a price increase.
• Remember that exercising force majeure may trigger the right of the buyer to terminate the contract and source from an alternative supplier if performance does not resume after a certain amount of time.

By Dr. Ahmed Alkalawy

Kalawy&Partnes integrated legal and investments Consultancy