In the post-Covid era, we are all familiar with the concept of supply chain disruption. International supply chains have been impacted by war in Ukraine, geopolitical tensions, extreme weather events and climate change. They are being impacted more recently by escalating conflict in the Middle East, and the strike by dockworkers on the U.S. East Coast.

These events are putting global supply chains under pressure. They are causing changes to shipping routes, delivery delays, increased transportation costs, and they can also lead to rampant inflation.

Supply chain disruption puts pressure on businesses that import and export goods. It can make the performance of contractual obligations more expensive, more difficult, or even impossible to perform. 

What can your business do to mitigate supply chain uncertainty?

Businesses must plan appropriately for disrupting events, and that includes having robust contract rights and remedies in place. 

It is important to use the appropriate contractual tool to protect against supply chain disruption and address each individual concern.

Businesses must plan appropriately for disrupting events, and that includes having robust contract rights and remedies in place. 

If you're the supplier, do you have the right to pass on increased costs to your customers? Are you at risk of a breach of contract claim if you fail to meet lead times?

If you're the customer, do you have contractual measures to incentivize your supplier to deliver on time? Do you have contractual measures to protect you from being in breach of contract if delays from your suppliers' end have a knock-on effect on your own performance?

In order to provide "a point of view like no other", we have talked to experienced attorneys in our Commercial teams in the UK and the U.S. to find out what contractual tools are available in each jurisdiction to help you navigate these issues to minimize disruption and liability to your business.

The UK perspective – Peter Snaith

In the UK, the latest disruption to global supply chains is causing issues for exporters. It will make transportation slower and more costly. For importers, they are likely to see longer lead times which can cause a shortage of parts and a knock-on effect for downstream contracts. There are also likely to be price increases which importers may or may not be able to pass on to their customers.

The UK saw a change of government in July 2024, and the Labour Party is now in power. Early indications are that the new government is seeking to improve UK relations with the EU. This could be good news for UK businesses who trade with EU counterparts and a departure from the previous post-Brexit policy.

Under English contract law, there are a number of contractual tools, which you can include in your contracts, to mitigate supply chain volatility. These tools include the following:

• Force majeure clauses: A force majeure clause excuses a party from performance where a particular event (pandemics, extreme weather, or other "act of God" scenarios) arises. Under English law there is no default definition of force majeure, so the scope of what counts as force majeure and the protection offered by the contract depends entirely on what the contract says. Suppliers will want to include a broad scope of events in the force majeure definition. Customers will want to expressly exclude any specific events they consider to be within the supplier's control. Not all force majeure clauses are equal, and you need to think about how far yours goes. For example, can the counterparty terminate if the force majeure event continues for a prolonged period of time? Does the counterparty have an obligation to fulfil its obligations to you ahead of or at least as quickly and robustly as it fulfils its obligations to third parties? You also need to consider how the force majeure clause interacts with any requirement for a business continuity plan. Some contracts say that the supplier cannot rely on the force majeure clause if it could have avoided the event had the supplier complied with a business continuity plan. You need to think about whether this is reasonable and whether your counterparty would agree to such a clause. Note also that in the UK, force majeure clauses with a very broad application may be viewed as a form of exemption clause. Where that is the case, they would be subject to the Unfair Contract Terms Act 1977, if it applies. Finally, in the UK, if a contract does not contain a force majeure clause, it may be possible to rely on the legal doctrine of frustration. However, this is very difficult to demonstrate, and it is rare that the English courts permit it.

Not all force majeure clauses are equal, and you need to think about how far yours goes.

• Sanctions clauses: If your transaction carries a potential sanctions risk, it is advisable to include a dedicated sanctions clause in your contract. A force majeure clause that references sanctions may not give you the immediate and unqualified termination rights needed to comply with sanctions.
• Price variation mechanism: Where contract performance becomes more expensive as a result of supply chain disruption, a price variation mechanism can help. A price variation mechanism gives one or both of the parties the right to amend pricing. An alternative is to include a hardship clause, which gives the parties the right to reassess the commercial bargain. In the UK, if the contract does not contain such a mechanism there is no right to vary the commercial deal between the parties unless the parties agree to do so. Persuading a customer to agree to a price variation when they are benefiting from a fixed price under a long-term arrangement could be very challenging, or even impossible.
• Termination rights: There may be occasions where the delivery delays have become unsustainable, or the price increases mean that the contract is no longer profitable. In those cases, you will need a break clause which enables you to terminate the contract and walk away. In the UK if you don't have an express contractual right to terminate then, under the common law, you can only terminate for the most serious (repudiatory) breaches. So, a robust termination clause is essential. If you're the supplier, and you incurred set up costs for the contract, you may want to include a clause providing for an early termination fee. The customer would be required to pay this fee if it terminates the contract for convenience within a certain period of time.
• Stock reservation commitments: From the customer perspective, it may be possible to agree a contractual stock reservation commitment from the supplier. This would oblige the supplier to prioritise delivery to the customer in the event that a force majeure event occurs. From the supplier's perspective, it may seek a contractual right to apportion any available stock amongst its customer base as it sees fit.
• Alternative sourcing: Where delivery is delayed due to supply chain disruption then it is possible under English law to include a number of remedies in the contract which offer protection to the customer. This includes the right for the customer to cancel the order without liability to the supplier and to purchase substitute goods from an alternative supplier and recover the customer's additional costs from the original supplier. Whether it is possible to include these remedies in the contract will of course depend upon the relative bargaining power of the parties. Where your contract contains exclusive purchasing/supply provisions, you might also seek to include a clause which relaxes exclusivity when supplies are disrupted. That sort of clause needs to be carefully drafted – you need to think about how long exclusivity is waived for and the circumstances in which it will apply.
• Dispute resolution clauses: Where a dispute arises between the parties due to delivery delays or increased costs due to supply chain disruption, the parties may wish to try and resolve the dispute by commercial discussions before proceeding to litigation. A tiered dispute resolution clause can provide a contractual obligation for the parties to carry out these negotiations. In accordance with the Civil Procedure Rules in the UK, the English courts will expect parties to engage in alternative dispute resolution so it may make sense to reflect the most suitable ADR mechanism in the contract.
• Ongoing monitoring and audit rights: Consider including a contractual obligation on suppliers to actively monitor for supply disruptions and to keep you informed. An early warning system can help your business to manage the effects of the disruption on your operations. You may also wish to seek audit rights in the contract to enable you to monitor your suppliers' processes and systems.
• Other Rights Similar to the US Rights Noted Below: Many of the strategies noted below with respect to U.S. contracts are also applicable in the UK. For example, in the UK a tooling agreement will also be relevant if your supplier has your tooling on its premises. Regarding title transfer, in the UK you also need to think about when title transfers and you can use a retention of title clause to give the supplier a right to recover goods. You do need to be aware that the Corporate Insolvency and Governance Act 2020 reduces some of the protection offered by retention of title clauses and they can also be harder to use in an international supply context.

The US perspective – Jamie Stone

US supply chains continue to experience ever-increasing disruptions from material and labor shortages, hurricanes and other extreme weather events, port holdups, and global conflicts. In the face of all of these potential issues, protecting your interests through carefully negotiated contract terms and effective managing of your supply chains beginning at the outset of your contractual relationship can be vital to remaining successful in the face of disruption. Some of the key tools to consider in connection with your US contracts are as follows:

• Force majeure clauses: Many of the same force majeure considerations applicable to UK contracts noted above also apply in the U.S. But in considering whether a force majeure event has occurred, U.S. courts have emphasized the importance of the contract expressly listing out the types of events that will constitute force majeure events – so, it is advisable to carefully reflect on the types of disruptive events that may occur and make sure those events are called out in the contract. In the U.S., the impacted party will also need to show that the force majeure event caused the party to be unable to perform, and a mere economic hardship will generally not be sufficient. This could mean that, for example, a party is not excused from performance based on one method of transportation becoming unavailable, if another method of transportation is available, even if that alternative method is significantly more expensive. U.S. common law also recognizes a concept related to force majeure known as the defense of “impossibility” or “frustration of purpose”. These common law defenses may be available to a supplier in the case of a supplier’s non-performance as a result of unforeseen events that essentially destroy the expected value of the supplier’s performance.

In considering whether a force majeure event has occurred, U.S. courts have emphasized the importance of the contract expressly listing out the types of events that will constitute force majeure events – so, it is advisable to carefully reflect on the types of disruptive events that may occur and make sure those events are called out in the contract.

• UCC remedies: U.S. parties can also look to the rights and remedies that may be available to them under the Uniform Commercial Code (UCC). Each U.S. state has enacted its own version of the UCC, so it is important to consider and determine the applicable US state governing law in drafting your contracts and enforcing your rights. The UCC provides for a defense to a contract party’s performance based on “impracticability”. Also, in the event that a seller can only partially perform, the UCC requires the seller to notify all buyers of the seller’s inability to fully perform, and to allocate the seller’s goods among the buyers in a “fair and reasonable manner”. Accordingly, in the event that your supplier has only limited goods available, the UCC might help ensure that you get your fair share.
• Stopping Goods in Transit: The UCC also provides the right of a seller to stop goods in transit if the buyer either repudiates the contract or fails to make a payment that was due before delivery. A communication from your buyer in the face of a disruption event might constitute a repudiation, in which case, consider whether you should alert your carrier to return the goods to you.
• Title Transfer: When you are supplying goods to another party or selling goods to your customer, consider the point at which title will transfer to the buyer, or potentially take a security interest in the goods until such time as the goods are paid for. Having ownership or a security interest in the goods might facilitate your recovery of the goods. 
• Protecting Tooling: If your supplier has any of your tooling on their premises, be sure to have a tooling agreement in place or to include terms that cover your tooling rights within the supply agreement. In case you need to quickly resource to an alternate supplier, the tooling agreement can lay out your rights to come on the supplier’s premises and recover your tooling. It can also ensure that your supplier only uses your tooling to fill your orders and prohibits your supplier from permitting its creditors to assert a lien on your tooling.
• Other Rights Similar to the UK Rights Noted Above: Many of the other strategies noted above with respect to UK contracts are also applicable in the U.S. In particular, alternative sourcing and stock reservation commitments (typically referred to in the U.S. as “safety stock”) can be very useful mitigation strategies in the face of supply chain disruption, which strategies are solution-focused rather than dispute-focused. In addition to the monitoring and audit rights noted above, U.S. parties might also consider negotiating for a contractual right to demand “adequate assurance of performance” if it seems that a counterparty is in danger of not performing under the contract. Finally, consider your choice of law and forum selection clauses closely in your U.S. contracts. Having a multitude of different applicable U.S. state laws and having to litigate or arbitrate claims in multiple jurisdictions may make it difficult to manage and enforce your rights in the event of widespread supply disruption.

Consider your choice of law and forum selection clauses closely in your U.S. contracts. Having a multitude of different applicable U.S. state laws and having to litigate or arbitrate claims in multiple jurisdictions may make it difficult to manage and enforce your rights in the event of widespread supply disruption.

What should you do next?

• Template review: Review your standard terms and conditions of purchase and sale, and your template contracts. Look closely at the terms which offer protection from supply chain disruption. Are they sufficient? Do they need to be strengthened?
• Review of existing contracts: Look at your existing contract portfolio, focusing particularly on key contracts with suppliers and customers. Do they offer sufficient protection in the event of risks from supply chain disruption? Do they need to be updated to reflect the changing geopolitical landscape? Is it time to re-negotiate the terms with your counterparty? If you have used a multitude of forms in your contracting and/or frequently negotiated supply chain disruption terms, consider the impact of managing those varying contractual obligations at a time when a disruptive event has occurred. Having standardized terms in place on these issues will result in a more stable contract environment to support your business through a disruption.
• Reach out to your legal team: If you are uncertain about whether your existing contracts or templates offer sufficient protection then it is time to reach out to your legal team who can support you to amend and (if necessary) re-negotiate them. Where you are dealing with international businesses it may be that you need local law advice to make sure you take account of any local laws that may impact on the obligations of the parties to the contract. 
• Revisit your insurance policies: Take a look at your insurance policies and see whether they offer any help from claims arising from supply chain disruption. Do they contain any exclusions you need to factor into your business plans? Note that some insurance policies may exclude certain force majeure events – the devil will be in the detail.
• Review your business continuity plans (and those of your key suppliers): Your business continuity plan should focus on maintaining operations when an unplanned event occurs. You need to make sure that your plan reflects the latest risks. For example, does it address disruption events linked to ransomware attacks and cybersecurity issues? You may well include a clause in your contracts requiring your suppliers to also maintain a business continuity plan, but have you reviewed it to make sure it is adequate? Has your supplier provided evidence that the plan has been stress tested? Consider what alternate transportation routes might be available to your supplier if the existing route becomes impassable. Has your supplier identified a key and single point of contact for you to be able to reliably communicate with and receive information and updates? Are there any specific measures you need the supplier to put in place?
• Know your supplier: Knowing that supply chain disruption is an inevitable part of commerce, what due diligence can you carry out on your supplier, before you enter into the contract, to make sure that they have robust processes and practices in place to mitigate the effects of supply chain disruption? Can your suppliers evidence a collaborative approach to resolving the impacts of disruption? Should you consider onboarding a second or third source supplier? Consider running available business reports on new suppliers and requiring them to provide financial data to evidence their financial stability. Once the contract is in place you need to monitor your key suppliers and carry out an ongoing risk assessment of their ability to fulfil their contractual obligations. Audit rights in the contract can help with this, as can the implementation and monitoring of Key Performance Indicators (KPI’s). Consider whether there are any signs that your supplier may have supply issues – and often rapid and significant drops in KPI’s can be a good indicator. An early conversation could give your business more options and due diligence is essential even if your contractual terms are robust. It is always better to anticipate and avoid a claim than need to bring one.
• Stock management: Knowing that supply chain disruption is likely, are there practical steps you can take to mitigate against it? For example, can you build flexibility into your lead times or downstream contracts, can you build up a stock/inventory reserve? Is an alternative contracting model, such as a consignment stock/inventory arrangement, possible?