Legal action will have ramifications across the supply chain © Matthew Horwood/Getty Images
Legal action will have ramifications across the supply chain © Matthew Horwood/Getty Images

Why you should take a 'good faith approach' to contract disputes

Will Green is news editor of Supply Management
6 May 2020

Procurement and supply chain executives are being urged to take a “good faith approach” to contract disputes caused by the coronavirus pandemic.

A declaration of force majeure, which excuses one or both parties from carrying out their obligations, might seem a natural course for firms struggling to cope financially.

But if the other party finds a counter argument this could lead to a costly dispute with ramifications for all involved, including those further down the supply chain.

Martin Noble, commercial partner at law firm Shakespeare Martineau, in a blog for SM, said: “There is the option of taking a good faith approach instead. This can be a wise move for supply chain professionals, allowing a way forward to be negotiated, not argued.

“Currently, every business is under the same strain, creating a rare opportunity for mutual understanding. By being transparent about their own situations, those in the supply chain can work together to find a practical solution to the problems they are facing.”

Noble said ahead of any legal action, organisations should:

• Investigate when contracts are coming to an end

If it is due to come to a close soon, this offers a natural conversation starter to discuss changes to the agreement in future. However, if there is a still a way to go, the contract might have some flexibility built into it.

• Discuss whether agreements can be altered

It is worth discussing whether the agreements can be altered to provide more leeway in the current economic environment.

As well as changing current agreements, negotiation can also be used by businesses to agree any clause that works for them, which they should then document in writing. The agreed terms can be temporary, and do not have to be mentioned in the original contract in order to be invoked.

• Consider suspending the contract

If one party has not paid, then suspending the contract might allow sensible negotiations for future trading to take place.

For example, a supplier and customer can agree to suspend certain obligations until lockdown is lifted. This provides relief for both parties, but also keeps the contract open, allowing it to resume once things return to normal.

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