Disruption to the supply chain caused by the spread of COVID-19 poses serious problems for all aspects of almost any business. For those sourcing, manufacturing and transporting goods, there can be a significant challenge in managing legal and commercial risks with both suppliers and customers.
Written by Robert Lawrence and Leonard Soudagar
The purchasing, operations, sales and legal teams should coordinate to ensure a proactive, integrated approach. Whether dealing with issues on the supply or demand side, communication of the steps taken and what you expect of your counterparty will be key to maintaining trust and confidence, and mitigating the effects of COVID-19.
Ongoing action should be taken to evaluate the risks and what steps may need to be implemented. This is likely to include:
- Mapping exposure to suppliers to ensure continuity of supply, including:
- identifying all goods required for production and distribution;
- identifying precisely where those goods originate;
- seeking information from suppliers as to their inventories and identifying potential issues / defaults;
- exploring and establishing alternative (local) sources of supply, production and distribution; and
- monitoring and assessing the situation regularly.
- Assessing and managing any increased costs of fulfilling your obligations.
- Monitoring the effects of logistical constraints and assessing the options available as a result of:
- delays due to quarantine and port/immigration checks and restrictions;
- ports/borders closing and voyages being suspended;
- the increased costs of transportation or the short supply of assets;
- revised customs and excise procedures; and
- delays in obtaining documentation and approvals required for the import/export of goods, or where documentation (such as letters of credit) has expired.
Many businesses will have cash flow issues and there may be additional delays in payment, and payment processing. Some may be at risk of insolvency. Therefore consider what security may be called upon, such as guarantees, performance bonds, indemnities or insurance.
The effects of COVID-19 will inevitably lead to disputes. It is therefore crucial to:
- Review your contracts to:
- identify which contracts are likely to be most vulnerable to the impact of COVID-19; and
- determine what rights and remedies are available, which may alleviate the effects of the virus, and what obligations and exposure you may have.
- Preserve your rights by:
- bearing in mind that any communications sent may ultimately be scrutinised by a court or tribunal;
- carefully responding to points that may vary terms or waive rights; and
- maintaining a record of all communications and documents.
From our experience of COVID-19 matters to date they may raise the following contractual issues.
Force majeure: Generally, force majeure is an exceptional event beyond the parties' control, which makes performance impossible or impracticable. It is intended to provide relief to a party that is prevented from complying with its obligations through no fault of its own. This may include suspending performance, extending the time for performance or terminating the contract.
Force majeure broadly applies as a matter of law across the GCC and so it will be relevant regardless of whether it is provided for in the contract.
Under English law, which is still typically the governing law of many of the international trade and transport contracts entered into by companies in the GCC, there is no general principle of force majeure: a party may only rely on force majeure if there is an express contractual provision allowing it to do so and it can demonstrate that the clause is triggered.
Whether a party may rely on force majeure and what action is may take will depend on the particular facts, the terms of the contract and the governing law. But in response to the effects of COVID-19, it would be prudent to:
- Consider whether the event was within the parties' contemplation when the contract was formed. Was it before the virus was declared a Public Health Emergency of International Concern on 30 January 2020, or before it was declared a pandemic on 12 March 2020?
- Ask what is the true cause of the inability to perform and are there multiple causes?
- Explore alternative ways in which the relevant obligation can be fulfilled and what steps can be taken to mitigate the effects of the force majeure event.
- Give notice in accordance with the relevant contractual provisions and exercise the correct option. Given the speed at which businesses are having to respond this can be easily overlooked.
Frustration: The English law doctrine of frustration applies where an event makes the contract either impossible to perform or its performance radically different from that undertaken when the contract was formed. It is generally difficult to establish that the contract has been frustrated, but it may arise in the context of import/export restrictions. Similar concepts exist under the laws of GCC States.
Illegality: Performance may be rendered illegal if it contravenes changes to the law in response to the virus (eg continuing production during a government imposed shutdown).
Title and risk: Consider when title to and risk in the goods transfers. A retention of title clause can give the seller priority over secured and unsecured creditors.
Exclusivity: Consider what steps may need to be taken to facilitate an alternative source of supply without breaching the terms of an exclusive supply agreement.
Time / shipment periods: Bank closures and public holidays declared in response to the effects of the virus may affect a party's obligation to perform where the time period for performance is defined by reference to 'Business Days'. Timing is important under sale contracts as delay in shipment or delivery could have a significant bearing on the price of the goods and may entitle a party to terminate for breach.
Renegotiation and variation: If the contract is no longer commercially viable or practicable, it may be possible to renegotiate terms or agree a temporary suspension. Care should be taken to ensure the variation is valid and binding, and rights are not waived accidentally.
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