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Will the pandemic trigger a change to supply contracts?

| Apr 8, 2021 | Corporate Litigation

Modern supply chain management is contingent on an array of contractual agreements. The COVID-19 pandemic has highlighted some flaws of this system and may serve as a catalyst for change to supply agreements. As noted in a recent review in Bloomberg Law, these types of agreements are often dependent on every piece of the puzzle meeting the precise expectations set forth therein. A single misstep, a relatively minor delay, and the agreement often is unsalvageable.

How has this impacted current agreements?

In an effort to ensure performance, supply contracts often included penalties for nonperformance. Amidst the pandemic, however, suppliers of goods unable to perform their obligations relied upon force majeure provisions contained in the agreements to excuse nonperformance.  As a result, purchasers were left to find other ways to meet their supply needs, if at all possible.

Although many purchasers in this situation have not chosen to pursue litigation thus far against suppliers, in certain situations it likely makes sense to pursue legal recourse for breach of contract.  For example, if the supply contract includes a specific delivery timeline that was adhered to as a course of dealing, then a purchaser might consider pursuing a claim.  If the historical relationship involved delays or partial shipments, then such a claim will not be as strong.

Some buyers may also consider testing the enforceability of the force majeure provision at issue. Some jurisdictions require the event triggering the force majeure provision to be be unforeseeable. As such, a party seeking to enforce the supply agreement potentially could argue that continued reliance on the pandemic as a justification for the force majeure provision may no longer qualify as an unforeseeable event.

What does this mean for the future?

Potential changes could include:

  • Increase in due diligence. Buyers may push for more in-depth due diligence in an effort to better understand the supply chain.
  • Removal of force majeure clauses. The pandemic may have been the death knell to force majeure provisions. However, suppliers may push back and demand an increased price to balance the risk that comes with losing the force majeure safety net. If a force majeure provision is included, the list of triggering events that likely will be reduced.
  • Revision of agreements. It is likely businesses will reevaluate their contractual agreements and make changes to better reflect the evolving marketplace. This could include a push for increased transparency from suppliers and additional warranties within the contracts. Supply agreements may also include more flexibility and allow buyers to use other suppliers in the event the original supplier is unable to meet their end of the contractual bargain.

Although future change is likely, it is important for businesses that are currently navigating these agreements to push forward in a manner that mitigates loss.  Arbitration may provide a viable alternative to costly litigation, while still helping both parties reach a manageable resolution to their dispute.