Supply Chain Litigation: Mitigating Risks via Contracts

Description

COVID-19 has disrupted supply chains worldwide, requiring many companies to adjust operations and their business. Supply chain litigation has not erupted as companies seek commercial solutions, recognizing that there is little to gain from litigation when they are still dependent on those same suppliers to restock them and stay in business. However, companies are reevaluating their contractual rights and defenses in anticipation of future litigation.

When a supply contract specifies delivery dates and quantities or notes that, "time is of the essence," and includes fixed prices, strict compliance with the terms is typically required, and failure to comply constitutes a breach of contract. However, if the parties have routinely permitted partial shipments or delayed shipments, or if the agreement allows them, the course of performance or terms may not require strict compliance, and a breach of contract action may not be viable. For these reasons, contracting parties should consider the specific terms of their contract and the historical performance while evaluating a breach of contract action.

Force majeure is typically found in supply contracts, but the details of this provision vary widely. Courts generally construe force majeure provisions narrowly. General phrases in a force majeure provision, including "other similar events or causes," will be confined to things of the same kind or nature as the particular matters mentioned. Performance must be impossible and economic hardship is typically insufficient. A properly drafted force majeure clause for the current environment would include phrases such as "pandemic." However, some claims have been successfully invoked using phrases such as "government orders" and "natural disasters."

If a contract does not contain a force majeure provision or does not include the type of event causing the breach, the UCC’s doctrine of commercial impracticability (UCC 2-615) and/or the common law can excuse performance under the defenses of impossibility or frustration of purpose. However, in some jurisdictions, the existence of a force majeure provision could render the invocation of impracticability, impossibility or frustration of purpose more difficult.

Listen as our expert panel discusses when and if a company suffering from the supply chain breakdown should bring a lawsuit. The panel will discuss when the contracting parties should continue to work together to find reasonable commercial solutions to address any supply chain disruptions and resulting contractual breaches.