Following the Prime Minister’s official statement declaring a lockdown in the UK, it is now clear to see how the Coronavirus crisis will severely impact the British economy, however, the full extent is still unknown.
Businesses should, in particular, consider any threats in relation to their commerce as many companies have had to close or reduce their operations and will be experiencing a shortage in labour. This will lead to delays in the production and delivery of goods which will disrupt supply chains around the world. Businesses should therefore devise an action plan on how to mitigate any potential supply chain disruptions to their existing contracts.
Dan Dowen, Commercial Contracts Associate Solicitor, considers the steps that business should take:
Establish which contracts are affected by the crisis and undertake a detailed review of them to determine the rights and obligations of each party in the contract and how these will be affected. If possible, consider renegotiating or amending those contracts.
Some important clauses to look out for are:
Review your delivery terms and consider the penalties imposed under the contract for non-delivery and keep this in mind when supplying to or expecting the delivery of supplies from a business.
Most contracts contain this clause which will relieve a party from its contractual obligations in the event of the occurrence of circumstances beyond its control, which will often include an epidemic. If the conditions of this clause can be met, the parties may be able to terminate or delay the performance of the contract without suffering any liability for delays or non-performance.
In the event of intense supply chain disruptions which cannot be remedied, businesses may consider terminating the agreement, although this needs to be done in accordance with the terms of this clause. Consider the wording of the termination clause and how much notice, if any, needs to be given in order to terminate the agreement and if there are any termination consequences that may follow.
Contracts will often include a limitation of liability clause which may exclude and, where possible, limit a party’s liability under the agreement. This could inhibit or prevent a party’s ability to recover losses from the other party caused by Coronavirus.
Some contracts will contain provision that may allow the parties to claim liquidated damages which is usually a pre-determined sum of money which the parties have agreed to pay the other in the event of the occurrence of a specified breach of the contract. Such breaches may include the failure to place, deliver or pay for orders.
The governing law of a contract can impact how contractual issues are dealt with. Businesses should therefore identify the law that governs the contract and how this law will impact its enforcement.
If possible, consider negotiating potential solutions to any problem contract and amend them accordingly.
You must ensure that any variation or amendments is conducted in accordance with the contract. Be careful when negotiating such matters to ensure that in the process of negotiation you do not unintentionally waive any rights under the agreement or inadvertently agree to vary the contract.
Keep records of all discussions and monitor any early warning signs of the beginning of a potential supply chain failure. Such signs may include delayed deliveries or sudden requests for changes to payment terms / minimum order quantities. Keeping records will make it easier to identify when action needs to be taken.
Businesses should consider its insurance coverage to determine whether the current policies provide for losses incurred as a result of the disruption caused by Coronavirus.
Managing your supply chain appropriately is, of course, a very technical task that will involve having to accurately interpret detailed contracts. Failure to manage such affairs appropriately can quickly lead to contract disputes and potential claims against your business.
It is therefore highly advisable that you seek legal help when reviewing / amending your contracts for the purpose of managing your supply chain.
We, at Berry Smith, have an exceptional understanding of commercial contracts and supply chain management. We work with businesses on a daily basis to maximise their commercial opportunities while minimising their contractual risk and exposure.
For further information or to discuss how we can help your business, please contact Dan Dowen at firstname.lastname@example.org or alternatively call us on 029 20 345 511 and ask for the commercial team.