Nick Lees, partner at law firm Walker Morris, outlines the impact of the recent Suez Canal blockage on supply chains and how to resolve contract disputes when suppliers and distributors are unable to meet their obligations following incidents such as this.

Latest in a line of disruptions to global trade

On Monday 29 March 2021, the Ever Given, one of the world's largest container ships, was pulled free from the Suez Canal after blocking the waterway, through which around 30% of global container traffic flows annually [1], for six days. The Suez Canal blockage is, of course, the latest in a line of significant disruptions to international trade, including the Covid-19 pandemic and Brexit (both of which are continuing to cause delays and uncertainty at ports and administrative and commercial difficulties for businesses generally). It has therefore affected global supply chains which, in many cases, are already under severe pressure and the impact is likely to reverberate through them for some time.

How should affected businesses respond?

Recent significant and largely unexpected disruptions to international trade have highlighted the need for businesses to:
• Produce and implement crisis plans to cover both their day-to-day running when the unforeseen happens and the immediate 'fire-fighting' response.
• Consider how best to deal with commercial counterparties and potentially also financial creditors, particularly where an event has resulted in contractual and/or financial breaches or default.
• Address stabilising the organisation, including building in resilience, for the future. Commercially, that can involve:

o considering the maintenance of liquidity;
o 'shoring-up' inventory (and not operating a 'just-in-time' supply chain), which may have an impact for logistical arrangements and storage capability;
o reducing or removing over-reliance on any one source or country of origin for vital supplies; and
o considering 'on-shoring' or 'near-shoring' supply chain components where possible.

What legal and practical advice arises?

As part of a business' assessment of the impact of the Suez Canal blockage (or other supply chain disruption) on their commercial arrangements and financial viability, whether or not contracts or common law remedies allow the flexibility to renegotiate or the ability to terminate, commitments will be key - as will the ability to avoid or mitigate disputes.

The following checklist of legal and practical advice should assist.

• Undertake a review of all key contracts to determine where contracts (and commercial relationships) might allow for flexibility and the ability to negotiate to 'ride out' a crisis, and where pressure points or breaking points arise. Where there are pressure points, businesses should seek specialist advice on the options available, whether that be in relation to termination or suspension of contracts (see below); re-structuring or re-financing; or claiming pursuant to any trade credit or credit risk insurance policy.
• As part of the contract review, ascertain the existence and terms of any force majeure provisions, which may excuse one or more parties from contractual performance. Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should ensure compliance with any notification or other requirements, and any timescales, specified within the particular contract, and should keep records of all relevant factual and economic evidence as the impact of the crisis unfolds.
• Where force majeure does not apply, businesses should take specialist advice on whether the common law doctrine of frustration may assist to effectively terminate a contract.
• Parties should check their various insurance contracts. In some cases, invoking or receiving a force majeure or a frustration claim can impact insurance policies. In particular, parties should ascertain any notification requirements.
• Businesses should also establish the existence and implications of any other contractual provisions that may provide flexibility and/or commercial assistance. These might include (non-exhaustively) break clauses to terminate contracts or leases early, forfeiture clauses, insolvency provisions, price adjustment clauses, variation/no-oral modification clauses and material adverse change clauses.
• Commercial disruption, uncertainty, financial hardship, and contractual default can all prompt disputes. Businesses should therefore review contractual arrangements to ensure that they understand the extent of their, and their key counterparties', obligations and liabilities. Key clauses in this context include any guarantees, indemnities or performance bonds, limitation/exclusion of liability clauses and any endeavours obligations.
• Where possible and financially feasible, parties should consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage. Again, they should keep clear records of all factual and financial evidence upon which they might wish to rely in the event of any dispute.
• Where disputes do arise, parties should check whether the relevant contract contains any mandatory dispute resolution provisions. An effective clause requires the parties to follow a pre-agreed route to resolution, which can prevent any potential secondary dispute about whether and how the primary issue should be resolved; minimise the scope for any tactical game-playing (thereby helping to preserve commercial relationships); and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.
• Businesses should ensure that they keep open communication channels with staff, suppliers, customers and other key counterparties. Dialogue can minimise disruption or discord within a business and can often avoid or effectively resolve disputes, saving both commercial relationships and cash.

Getting expert advice to navigate supply chain incidents

Whilst the factual context of the Suez Canal blockage crisis is unique and the scale of disruption may be extraordinary, the legal and practical implications of an adverse event on a business are not. An experienced Commercial Dispute Resolution team can support businesses in successfully navigating uncertain times and seemingly devastating incidents, whether it be from a risk management ('prevention') perspective and/or to help with the resolution (or 'cure') of a dispute.

[1] Source: Reuters, 26 March 2021

Public link

Please use the above public link if you want to share this noodl on another website.