For many businesses, the onset of the COVID-19 pandemic was a cataclysmic event. In addition to closures, the limitations of public health measures exposed a lack of preparation for supply chain issues. Across many sectors, businesses of all sizes have been left scrambling to compensate for unanticipated disruptions in order to source materials and deliver products to clients.
In addition to challenges arising from the pandemic, trade has also been disrupted by natural disasters and trade sanctions in recent years. Consequently, many businesses have been learning the hard way that unexpected disruptions can have ripple effects across entire supply chains.
Is Your Business Exposed?
Before the pandemic, lean processes and just-in-time inventory practices were commonplace, but this has led to increasing pressure on slim inventories throughout the pandemic. This is particularly true of businesses that rely on foreign suppliers, with companies often finding themselves at the mercy of the weakest link in their supply chain.
Preparing for the Future
This can serve as an opportunity for businesses to prepare for future challenges by assessing their supply chain vulnerabilities and making necessary changes to build resiliency. Some of these changes may include:
Limiting Foreign Exposure and Evaluating Inventory Levels
Businesses may choose to evaluate their foreign exposure and maximize sourcing from domestic suppliers where possible. It is also worth reviewing both domestic and foreign product and component inventories to assess whether “just-in-time” inventory levels leave too little contingency. Some businesses may choose to maintain a “just-in-case” inventory level, even if this results in higher costs for such things as financing and warehousing/storage.
Identifying Alternative Suppliers
While businesses may have a strong relationship with existing suppliers, they may not have much insight into what is happening further down the supply chain. Many businesses are exposed to their own suppliers’ liquidity issues and insufficient inventory buffers. Insisting on greater transparency and visibility further down the supply chain allows businesses to identify future disruptions earlier. Cultivating a backup plan in advance helps avoid a scramble in challenging circumstances.
Business Continuity Planning
Business continuity planning involves anticipating various future disaster scenarios that would result in severe supply chain disruptions. Businesses may wish to review existing contracts with suppliers to understand which ones have business continuity plan obligations and identify contractual gaps. It is also advisable to inquire directly with suppliers about whether they too have business continuity plans in place.
What recourse do I have if my supply chain fails?
In normal circumstances, a contractual breach by a supplier is likely to have an element of fault. However, where a failure is due to the current context of the pandemic, and disruption is both widespread, and out of a supplier’s control, the supplier’s liability may be limited.
Force Majeure Clauses
Many commercial contracts contain force majeure clauses that limit the liability of a party due to an extraordinary event beyond anyone’s control, such as a natural disaster. In some cases, the clauses specify the types of events that constitute force majeure or contain a catch-all clause covering all other events “beyond the reasonable control” of the contracting parties. As these clauses vary widely, it is important to review their specific wording after a dispute arises to consider both the scope of the triggering event and the impact that event has on the ability of the party to meet the terms of the contract.
Notably, force majeure clauses are interpreted narrowly, and the party invoking it to excuse non-performance still carries an obligation to take reasonable steps to mitigate foreseeable risks. Additionally, a party invoking force majeure would need to show that performance has been truly prevented instead of merely being rendered more expensive or delayed. For example, if a contract requires supplies to be procured from an area currently subject to travel restrictions and no alternatives are available, the requisite level of impact and causation is likely to be met.
Many force majeure clauses provide performance times under a contract to be extended for a period equivalent to the time lost because of any force majeure delay.
Frustration of Contract
Absent a force majeure clause, the common law doctrine of frustration may be invoked by a party unable to fulfill its contractual obligations. This doctrine allows a party to set aside an entire contract rather than temporarily suspend the obligations contained in the agreement. The threshold for a claim of frustration is high, but it effectively puts an end to the relevant contract if it is met.
It is often preferable to adjust contracts through practical negotiation to allow all parties to preserve both the business relationship and as much value as possible, rather than merely demanding performance on the contract where such demands are impractical or impossible to be met.
Businesses may wish to consider establishing “without prejudice” discussions with suppliers to allow for a candid discussion about potential adjustments to contractual terms. By making these discussions without prejudice, the parties’ respective rights are preserved to seek a remedy later while allowing everyone to focus on minimizing future prospective breaches.
Contact Campbell Litigation in Kitchener-Waterloo for Assistance with Business Disputes
Campbell Litigation understands the complex and high-risk nature of business and commercial disputes. Our experienced team represents corporate clients in a wide variety of matters, including contract enforcement issues and business litigation. Richard Campbell has decades of experience in several dispute resolution processes, including mediation, arbitration, and litigation.
Our reputation is based on our years of experience and familiarity with the distinctive nature of the Waterloo business community. To find out how we can help you and your business, contact us at 519-886-1204 or reach out online.