Supply Chain Disruption and Contract Risk – Resolving Disputes

The current economic and political landscape is hard for so many UK businesses – but especially for those who rely on the physical production and movement of goods and materials.   Global uncertainties caused by the US administration’s wide-ranging policy on tariffs, the continuing war in Ukraine and the activities of cyber hackers all have a potentially disruptive effect on our supply chains.  Late shipments, skyrocketing costs and – in some cases – complete breakdowns in supply, are increasingly leading to contractual disputes. Prosperity’s Commercial Dispute Resolution and Litigation team have provided their expert guidance to help businesses better identify where disputes can arise, how to manage risk contractually, and how to resolve conflicts in an efficient way that has minimal impact on trading.

From disruption to dispute

It is easy to see how a disrupted supply chain can lead to disputes.. A few examples might include:

• Late delivery or poor performance by a supplier impacting on the manufacturing, processing and onward supply of goods can trigger further delays in onward supply and lead to breach of contract claims.
• Cost increases (perhaps caused by trade tariffs) leading to the need for price increases and consequential disputes and/or an inability or refusal to deliver.
• Disagreements over whether ‘force majeure’ applies.
• Disputes over whether termination rights have been justifiably exercised;
• Quality or compliance failures, caused by rushed or substituted (inferior) materials.

Disputes can also be exacerbated by poorly drafted contracts – a frustratingly avoidable cause. A few examples that can give rise to disputes are:

• Ambiguities in agreed delivery timelines and responsibilities or in the terms agreed in respect of price (particularly price adjustment).
• The aforementioned force majeure clauses – if clauses are too narrow or lack clarity and therefore may not fully cover the situation that has arisen. This leaves ambiguity over whether performance has been excused or the supplier is in breach.
• A lack of, or unclear, escalation mechanisms or dispute resolution clauses.
• Unclear governing law or jurisdiction – especially prevalent in cross-border contracts.

Disputes, once they have arisen, can be time-consuming and costly to resolve – on top of the financial impact of the original disruption, if that’s left unresolved. Resolving disputes quickly and efficiently is vital for your business’s health and future success.

Commercial dispute resolution checklist – contracts

To take a proactive approach to avoiding a formal dispute, you can tighten up your contracts. The following actions might be most useful:

1. Strengthen key clauses, such as:
   • Force majeure – define with precision, require prompt notification and evidence.
   • Price adjustment – suppliers should add provisions for inflation or cost spikes.
   • Termination – ensure triggers and obligations are clear.
   • Delivery – specify standardised delivery terms, introduce measures that help absorb delays or failures in the supply chain and have terms that allow for alternative arrangements to be employed if disruption occurs.
2. Add dispute-prevention mechanisms, such as:
   • Escalation clauses (e.g. negotiation, then senior review, then mediation).
   • Ongoing contract review processes for long-term arrangements.
   • Define what constitutes a material breach clearly.
3. Consider contractually requiring ADR before entering litigation.
4. Consider agreeing to arbitration of disputes instead of court litigation.
5. Audit existing contracts for dispute risk hot spots.
6. Identify key supplier contracts and understand the risks they present to your business, in the event of disruption.

Commercial dispute resolution checklist – in the case of conflict

But even with all of the above in place, conflict can still arise. In such cases, you can use the following methods to try and deescalate conflict, to avoid litigating in the courts:

1. Focus on early intervention:
   • Engage constructively before positions become entrenched.
   • Use legal counsel to assess the legal and commercial merits of your position and to advise on effective strategies for resolution.
2. Consider Alternative Dispute Resolution (ADR):
   • Mediation – quick, confidential, and helps to preserve commercial relationships between the parties.
   • Expert determination – can be useful for technical issues, like quality of goods, adherence to specification, etc.

If these attempts fail and you enter a formal dispute resolution process, you can set yourself up for success by quickly acting on the following – in consultation with your legal team:

1. If you are the claimant, identify the appropriate forum – court or arbitration – and prepare papers to issue the claim.
2. Ensure all relevant documents are secured and organised – preparation is key!
3. Speak to the key participants, who will be witnesses at a future stage, to understand what evidence they will give and whether it supports your position.
4. Assess the merits and costs of formal legal action.

Prosperity’s Commercial Litigation team can proactively assist to help you avoid formal litigation, where possible, and to achieve the best outcome available.  Disputes are becoming more common and more costly, meaning it’s usually more efficient to avoid escalation. Get in touch with the team at andrewfarrell@prosperitylaw.com to discuss how we can help you.

Glossary

Commercial dispute resolution – The act of resolving a business-related disagreement between two parties.

Supply chain disruption – An event that causes a breakdown in the provision of goods and materials.

Breach claim – A legal claim filed when someone has suffered harm due to a breach of a contract.

Force majeure – A contractual clause that excuses parties from fulfilling their contractual obligations when an unforeseen and uncontrollable event makes deliver or performance impossible or impractical.

Termination rights – The entitlement of one or both contractual parties to end the agreement under specific circumstances.

Alternative Dispute Resolution (ADR) – A variety of methods for resolving disputes outside of traditional court proceedings

Mediation – One form of ADR where a neutral third party, the mediator, helps parties in a dispute reach a mutually agreeable solution. 

Expert determination – Another form of ADR where a neutral, technically skilled expert makes a binding decision on a specific issue in dispute between parties.

Arbitration – A third form of ADR whereby both parties agree to resolve their dispute through an independent arbitrator or panel instead of going to court.