To print this article, all you need is to be registered or login on Mondaq.com.
A global supply chain is only as strong as its weakest
link.
The pandemic has exposed this truism to startling effect, with
suppliers unable to supply, shippers unable to ship and customers
unable to get their goods on time.
This has resulted in defaults further down the supply chain,
leading to commercial tensions and losses. So, what should you
do?
From a legal perspective, the starting point will be to review
the relevant supply chain contracts. These may span more than one
jurisdiction, with correspondingly different legal codes applicable
to their interpretation and application.
Some of these contracts will provide for formal disputes to be
referred to arbitration and others may mandate litigation in the
applicable local courts.
Of course, the resulting analysis will throw up challenges, but
there may also be opportunities.
First mover advantage is a legitimate strategy to minimise the
risk of what may otherwise be an unsympathetic tribunal.
Not everything will be force majeure
Whilst reviewing your contracts, take a look for any express
provisions that may excuse or suspend the obligation to perform.
Force majeure or material adverse change clauses will often have
this effect.
However, not all such provisions would have been drafted with
current pandemic in mind. If the occurrence of the pandemic does
not obviously fit within the category of events recognised as force
majeure, consider the impact of the governing law of the
contract.
If this is based on the English common law, there is probably
less scope for relief than is available in civil law jurisdictions.
This is because the common law doctrine of frustration is stricter
in its application and harder to satisfy compared to force majeure,
which is a civil law concept.
Such civil countries include all of South America, almost all
European countries, China and Japan.
In the Middle East, by contrast, legal systems are generally
based on a combination of common law, civil law, statutory and
religious sharia law.
Similar to the laws in China, sharia law recognises materially
adverse change as a potential ground for relief or for a re-shaping
of contractual obligations.
The impact of Brexit
Where your project is in the UK, Brexit means there is a risk of
delayed delivery of goods through UK ports, a risk of increased
tariffs on goods sourced from the EU, and the possibility of a
shortage of labour (skilled and unskilled).
It would be a clairvoyant contractor who is able to predict with
any accuracy the quantum and likely impact of such risks, but most
rational business folk should recognise that such risks exist.
The question becomes how should those risks be allocated among
parties in the supply chain?
Some practices have been established over the last 12 months,
with owners having to factor into their investment case assessments
of the risk of their supply chain having to adjust their process to
reflect the impact of Brexit.
This may make some projects unaffordable, or require a greater
credit support with debt to equity ratios reduced as against the
investor.
Renegotiate existing contracts?
Whether it is Brexit of the Covid-19 pandemic, another option to
consider is re-setting the basis of existing contractual
arrangements to cater for their impacts.
This may involve re-allocating the risk of labour shortages
and/or delayed delivery of components.
Perhaps the party affected is allowed an extension of time and
relief for liquidated damages, but bears the cost of the increased
resources necessary to comply with new restrictions imposed by
local laws or Brexit-related delays.
Of course, you should keep records of the event, the steps taken
to mitigate, and the effect on the time and cost to complete.
New contractual frameworks
The need for stronger and more diverse supply chains in the
global construction sector is now apparent.
This will require new contracts with a larger number of
suppliers in different locations providing key components.
The force majeure provisions will no longer be regarded as
standard boilerplate but will now have to be carefully structured,
with flexible outcomes allowed for.
Watch those court backlogs
If you are invoking force majeure or some bespoke Brexit clause,
prompt and preventative action is best practice, and remember your
duty to mitigate.
You should also consider alternatives, including offering
partial performance.
If you are resisting force majeure, make sure to communicate
rejection notices promptly.
Another factor to consider is whether your local court system is
capable of processing the resolution of the dispute within an
acceptable timeframe; in many jurisdictions the enforced closure of
Court buildings has caused a backlog whereas all the main arbitral
institutions have remained functional (albeit remotely) during the
pandemic.
Global supply chains have been fractured by the pandemic and are
at risk from the fallout from Brexit. Doing nothing is not an
option.
Originally published by Global Construction Review
Visit us at
mayerbrown.com
Mayer Brown is a global legal services provider comprising
legal practices that are separate entities (the “Mayer Brown
Practices”). The Mayer Brown Practices are: Mayer Brown LLP
and Mayer Brown Europe – Brussels LLP, both limited liability
partnerships established in Illinois USA; Mayer Brown International
LLP, a limited liability partnership incorporated in England and
Wales (authorized and regulated by the Solicitors Regulation
Authority and registered in England and Wales number OC 303359);
Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong
Kong partnership and its associated entities in Asia; and Tauil
& Chequer Advogados, a Brazilian law partnership with which
Mayer Brown is associated. “Mayer Brown” and the Mayer
Brown logo are the trademarks of the Mayer Brown Practices in their
respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights
reserved.
This
Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.
