There will “undoubtedly” be legal disputes over who should bear the losses caused by the Covid-19 outbreak, according to lawyers.
In a comprehensive Q&A prepared for SM, David Roney, Dorothee Schramm and Katie von der Weid, lawyers at Sidley Austin, said shutdowns across the world, either through business decisions or government mandates, would present supply chain challenges for firms, either through their inability to make products for customers or suppliers being unable to provide shipments.
“Contracts in numerous different global supply chains are already being affected by an increasing number of force majeure notices, and there will undoubtedly be many disputes over who must bear the losses caused by Covid-19-related supply problems,” said the lawyers.
The lawyers have outlined five steps you should take in the event you can’t supply a customer, or a company cannot supply you:
1. Identify and document the exact cause of the supply problem.
If you receive a force majeure declaration from your supplier, ask for details about how exactly the supplier is affected by Covid-19 (and document those details) before responding or otherwise taking a formal position on that declaration. Do not accept a force majeure declaration that is vague or lacks specificity.
2. Anaylse whether the specific supply problem you face constitute force majeure.
Since the terms and governing law of every contract differ and do not necessarily provide a force majeure defence for unforeseeable events outside of the parties’ control, careful legal analysis of your specific situation is indispensable.
The availability, scope, and requirements of a force majeure defence will depend on the exact nature of the supply problems, the specific terms of your contract, and the governing law.
If your supplier has issued a force majeure notice, such that you cannot supply your own customers as a result, you should assess the risk allocation under each contract separately.
3. Issue the required notices of a force majeure event.
If your contract or governing law requires you to provide prompt notice of a force majeure event (which is typical), you may need to issue a force majeure notice before you have fully analysed the situation. When declaring force majeure, you should therefore use appropriate, broad language that covers different scenarios, and thus protects your legal position.
If you receive a force majeure notice from a supplier and then must declare force majeure to your own customers, carefully draft your notice to avoid affirmatively accepting your supplier’s force majeure defence. For example, you could reference the fact that your supplier declared force majeure and state that the lack of supply is outside of your control. This avoids prejudicing your company’s own position in a potential future dispute with your supplier.
4. Make and document your efforts to overcome the supply problems.
Many contracts and governing laws exclude a force majeure defence if it is possible to overcome the consequences of the force majeure event. Also, if you receive a force majeure declaration that you consider to be invalid, you must still attempt to mitigate your damages, for example, by making efforts to procure replacement goods.
5. Carefully manage the allocation of existing supplies.
If your reduced production output allows you to supply only a portion of your customers, review your contract and the governing law for any restrictions or guidance about how to allocate supplies.
If you receive a force majeure declaration, first determine how your supplier is allocating remaining stock and available product quantities and then, if you consider this allocation to be inappropriate, consider whether a request for interim relief may be available.
See here for more details on when a force majeure notice should be issued, the most efficient way to resolve a disagreement and what to do if threatened with litigation.
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