Contractual Concerns for Businesses

Supply Chain, Contracts, and Force Majeure

Many businesses in Northern Ireland have been caught off guard as the coronavirus (COVID 19) sweeps through the UK prompting wide spread self-isolation. Businesses are being forced to adopt a robust approach as government measures are under constant review with the aid of the World Health Organisation. As a result of the pandemic crisis it is likely that supply chains and other manufacturing operations will be disrupted. With many of Northern Ireland’s businesses relying on intricate and often cross-border supply chains, these businesses may either be unable to fulfil their contractual obligations or suffer loss because suppliers cannot fulfil theirs. The prospect of closure of airports and ports in Northern Ireland is putting further pressure on local businesses. It is therefore crucial in the coming months that businesses take steps to meet their contractual obligations and/or mitigate their commercial risk.

How will the coronavirus impact Supply Chain?

The true extent of the coronavirus’ effects is not yet known but many companies will see impacts across their supply chains. It is certainly not ‘business as usual’ when it comes to consumers, with many consumers preferring to stay at home amongst fear of exposure to the virus. Caution and financial insecurity may prompt consumers to shop online and stick to the essentials. This could prove challenging for supply networks. With the prospect of indefinite prolonged quarantine, it is likely that there will be considerable disruption to the labour force. Many workers will be unable to travel to work and workplaces will be closed indefinitely. There may also be a shortage of materials as areas affected by the pandemic may suffer shortages of parts, equipment and finished products. On top of this, businesses are facing logistics issues because even when the materials are available there are difficulties to getting them to where they need to be with obstructions caused to many established supply networks and logistics hubs.

What steps can be taken to limit the impact of the coronavirus on supply chain?

A communication plan should be implemented. This means that businesses should reach out to the suppliers of key contracts to determine what their stock and inventory levels are. What is in short supply and what steps are being taken to counteract this? Companies should gather as much information as possible, mapping out where the key weaknesses lie in their wider supply chain. The more this is done, the more capable businesses will be to offset the likelihood of a critical supply chain failure. It is crucial to develop a relationship between companies and upstream suppliers as early as possible. This will allow businesses to engage with the counterparties of these key contracts both from the early stages and throughout the coronavirus outbreak to minimise risk. Building these relationships early on may also safeguard against potential contract disputes when we come out the other end of this pandemic crisis. Communication is key in understanding how suppliers are being effected by the coronavirus outbreak, what contingency plans they have in place and what they are doing to mitigate risk. Suppliers should not delay in explaining to their customers what contingency plans are in place. This will help to maintain valuable customer confidence and goodwill.

What does the coronavirus mean for your commercial contract obligations?

Ordinarily when a business fails to meet their contractual commitments, a claim for breach of contract is a possible remedy. However, if the principle cause of the breach is an outbreak of a disease such as the coronavirus, this may not be an option. There are two reasons for this:

• There is a force majeure clause in the contract –This is a clause in a contract that excludes parties from performing their contractual duties in some way following a “triggering event.” In relation to the coronavirus this triggering event would be “a plague, pandemic or epidemic.” It is up to the parties to determine how they wish to word the specific clause in the contract.
• The doctrine of frustration applies – This is when there is a significant change of circumstances that render performance of the contract radically different from its original terms. When the frustrating event occurs, in this instance the coronavirus, parties are exempt from their contractual obligations and will not be liable for damages for non-performance. It must be noted that temporary frustration is not recognised and the contract will be permanently frustrated in the circumstances.

However, it cannot be assumed that businesses will be able to rely on the effects of the coronavirus pandemic as a defence for breaking their contractual commitments. The position will depend on the relevant governing law and the specific contract terms, but businesses should consider adopting the following strategies to help mitigate risk. Key Contracts should be reviewed. If possible, companies should assess what pre-emptive measures can be taken to avoid any potential breach. Depending on the type of business, this could mean stock piling products and materials or providing early delivery where possible. It is crucial to pinpoint which contracts contain which terms. For example, which contracts contain Force Majeure clauses? Do some contracts provide for short notice termination? Which contracts carry the heaviest sanctions for non-performance? Once a clear understanding has been reached, businesses should prioritise their contracts by level of importance and deploy their resources accordingly. Companies should consider addressing the coronavirus in any new contracts being entered into, providing clauses that deal explicitly with the risk posed by COVID 19. If their entire workforce is working remotely, businesses must be well equipped to properly execute documents remotely. This will mean having electronic signature capabilities.

Force Majeure

Businesses should consider using force majeure clauses and review all contracts to determine what their commercial rights are. As mentioned above, these clauses may relieve businesses from their contractual obligations for circumstances that are outside of their control. Such clauses will depend on the specific wording of the contract. Majeure clauses often contain general provisions such as “acts of god” or “factors that are beyond the control of the parties.” The burden of proof here is on the party seeking to rely on the force majeure clause. They must prove that the event falls within the clause and that non-performance was due to the event. Businesses must take reasonable steps to avoid the event or the impact of its consequences. The effect of a force majeure will depend on its wording in the contract and the following should be considered in the wake of the recent pandemic;

• Non liability: Once triggered, the party relying on the clause will not be liable for delayed performance.
• Suspension: Contractual obligations will be suspended whilst the force majeure continues unless agreed by both parties.
• Right to Terminate: Once triggered either or both of the parties to the contract can serve notice to terminate the contract.

In recent days and weeks, global consumerism, labour and logistics have slowed down and businesses will suffer supply chain issues as a result. Northern Irish businesses rely heavily on imported goods from Ireland, the EU, China and the US. With the prospect of airport and port closures looming, distribution from these main import partners is likely to be affected. To avoid a critical supply chain failure, it is suggested that Northern Irish businesses adopt robust continuity plans across their supply chain networks to adapt to the changing situation. If possible, Northern Irish businesses should consider shifting to local or ‘on island’ manufacturing as soon as possible. Identifying weaknesses in supply chains, developing a communication plan, taking advantage of majeure clauses and relief provisions and responding quickly may prove to be crucial in weathering this storm.

For more information or guidance, please contact Hilary Griffith, Director