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:
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:
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:
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.