Out-Law Analysis | 07 Sep 2020 | 7:20 am | 5 min. read
In moving to rebuild a resilient supply chain, businesses will need to consider a number of strategies as part of their business planning. No 'silver bullet' clause exists to fully protect any one party from the consequences of something as unexpected and with such far-reaching impact as Covid-19, and the best approaches will depend on the shape of the supply chain.
Organisations that learn from the current crisis and adjust contracts and processes as needed ahead of time will get a competitive advantage in the new world post Covid-19.
This is part of a series, find out more about creating a resilient supply chain regime.
Force majeure clauses have been tested by the Covid-19 pandemic like never before. Parties seeking relief from contractual obligations have been required to scrutinise and rely on these clauses, with the exact wording critical to defining the basis, scope and conditions for relief.
The drafting of force majeure clauses will be impacted by the experience of dealing with the effect of Covid-19 on supply chains. Currently, we are seeing significant focus on force majeure or excusable delay clauses in new contracts. These clauses are being drafted with the specific situation today in mind, and often provide for specific consequences relevant as the contract is entered into together with the specific relief that the parties intend.
As companies update their precedent documentation, we will start to see more material changes to force majeure clauses which consider both the lessons learned from the pandemic but also potential future disruption more broadly.
Given the inherent uncertainty, these clauses are typically linked to re-negotiation or termination rights if the situation pans out in a different way to that currently envisaged by the parties. The clauses deal specifically with Covid-19 rather than with future potential disruption more broadly.
In the medium term, as companies update their precedent documentation, we will start to see more material changes to force majeure clauses which consider both the lessons learned from the pandemic but also potential future disruption more broadly. Among the elements we expect businesses to review are:
In the longer term, change will ultimately be driven by case law as and when it emerges. It will important to see how these cases develop in light of the other provisions in the contract, such as liability; and the relief that is granted.
The evolution of force majeure clauses will be just part of the picture as businesses emerge from the pandemic and seek to rebuild resilient and robust supply chains. The issues remain varied, and the complexity of supply chains makes it challenging to impose a one-size fits all approach.
Mechanisms to consider include:
Of course, no one can be sure whether these changes to the force majeure clause and other elements of the contract will be effective against the next pandemic or similarly disruptive event. Although the contract drafting changes may help insulate a business in some instances, clearly there are wider lessons to be learned from this pandemic. Therefore, although the contract may be the first line of defence, supply chain planning and business continuity arrangements will surface as top priorities.
The challenge for businesses is to think the unthinkable. Imagine how your business would deal with a global fuel shortage, major cyber attack on global banks or prolonged global internet outage. If you are tempted to discount these as unrealistic, think of the wide-reaching impact of Covid-19.
For businesses building resilient supply chains, this is important context. A resilient supply chain needs to factor in both the predictable elements of change - such as changes to volumes - and the unpredictable elements. A truly resilient supply chain will continue to meet customer need and expectations, notwithstanding any potential disruption along the way.