Disputes Arising Out of Supply Chain Disruptions

Every media outlet you tune into these days seems to be covering difficulties in the nation’s supply chain. These disruptions have resulted in bottlenecks and shortages of key goods across the country. Projects and deals across industries have been put on hold because companies cannot procure what they need to get the job done. While there have been small improvements, experts are forecasting that the disruptions will continue well into 2022. If you must perform under the terms of a contract that you signed, the supply chain disruptions can be a nightmare for your business.

You Have Some Protections in the Event of a Contractual Dispute

Contracts require the delivery of a certain product or service by a certain date. Each side has its own legal obligations they must perform under the penalty of breach of contract. Many business owners are terrified that circumstances beyond their control could leave them facing a lawsuit and penalties. The good news is that some protections may keep you from being penalized for something that is not your fault. The actual contract itself may protect you. If the contract is missing key language, principles of contract law could keep you from being successfully sued.

The Contract Itself Could Protect You

If you are being sued because of issues relating to a supply chain disruption, the first place a judge would look is the contract itself. Your legal rights under the contract are determined by the clauses and language in the document. That is why this is where a court will look first in the event that you have a dispute. There is one particular clause that may be helpful in the event of supply chain difficulties. Most contracts will have a force majeure clause. This term will excuse performance under the contract when certain things happen. It is meant to keep people from being held liable for extraordinary events that are beyond their control that keep them from performing their obligations under a contract.

Courts will look to the exact language of a force majeure clause to see if one party is relieved from performing. While this clause has historically focused on disasters and other major events, force majeure can possibly excuse performance when it is impossible for other reasons. Some force majeure clauses include supply shortages as an event that would excuse performance.

However, many force majeure clauses include a catch-all provision for events outside the control of the parties that make performance impossible. This could arguably be read to include supply chain disruptions. Hopefully, your contracts have force majeure clauses with either specific language about supply issues or general language to protect you.

The Contract Could Be Impossible to Perform

Even if a force majeure clause does not cover supply chain disruptions, there are other principles of contract law that could address the issue. Even when two parties have a contract, it may not be enforced when any of the following apply:

• Impossibility
• Impracticability
• Frustration of purpose

All of these doctrines consider to some degree whether it would have been possible for both parties to perform the contract. The contract may never have been possible to perform under the circumstances. One party may have had every intention of performing, but they could not because of things that were beyond their control.

Courts take the language used in contracts seriously, and it is not easy for someone to argue that their own performance should be excused. However, the fact that supply chain difficulties were unforeseeable, and the failure to perform was nobody’s fault, could help if the matter goes before a court. Nonetheless, the frustration of purpose must have been extensive. The mere fact that a party would suffer a financial loss would not be enough on its own for them to escape their obligations under the contract.

Practical Advice for Supply Chain Disputes

How you handle supply chain disruptions could determine whether you end up in litigation. If you have been impacted by supply chain disruptions, it is best to communicate and have a dialogue with the other party or parties to the contract. You may be able to amend the contract or come to an understanding with them that could help avoid litigation. Usually, litigating should be your last option when you have no other resort.

Your best bet is to do what you can to preserve your commercial relationship for the long term. If that means being flexible, it is better than ending up in court and incurring the high costs associated with litigation.

Two parties have the ability to renegotiate the terms of a contract. This could lengthen the amount of time the parties have to perform their obligations. You are often better off negotiating when the other party may be in breach of contract, especially because a court may find their position more deserving of a favorable ruling. If you terminated the contract, or sued for breach, you would still need to find another supplier. The second supplier may not be any better than the first, if you even find someone else who could supply your company. However, you may have contracts with subcontractors of your own that could force you into a position where you have to enforce the contract.

In addition, you should review all of your existing contracts. Even if you cannot amend current contracts to account for supply chain disruptions, you can change future contracts. You may want to pay close attention to, and perhaps modify, the force majeure clauses in your contracts that take disruptions into consideration. Regardless, you should consult with an experienced attorney because determining your contractual rights in connection with a supply chain disruption is a fluid situation that requires legal guidance.

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