Global supply chains have suffered significant pressure over the past several years because of Covid-19 and now Russia’s invasion of Ukraine. These disruptions, whether they are caused by practical realities or legal restrictions (such as financial sanctions), could impede or prevent the performance of many supply contracts.
If there is a risk that a business or their counterparty may become unable to perform contractual obligations, it is important they consider the legal position as soon as possible. There are key tactical considerations which businesses need to keep in mind to avoid legal pitfalls.
Struggling to fulfil your contract?
If a business anticipates that it may imminently or in future be in breach of contract, it is vital it seeks to reduce liability as a result of that breach. This can be achieved in numerous ways: the first is informing the other party promptly of the forthcoming disruption. There is rarely any advantage in waiting for the breach to occur before addressing the problem. Given that the counterparty is likely to be under a duty to mitigate their losses, making that counterparty aware of the potential disruption sooner rather than later may enable (or, indeed, oblige) the counterparty to take the requisite steps (such as finding alternative suppliers). In the best-case scenario, substantial damages for the subsequent breach may be avoided altogether.
However, such communications need to be carefully worded, particularly if the subsequent breach is not a foregone conclusion. Otherwise, the proactive messaging may inadvertently constitute a repudiatory breach of the contract. This may occur if the communication may evidence the business’ inability or unwillingness to perform a key term of the contract, giving the counterparty the right to end the contract immediately and claim damages, or affirm the contract and claim damages if that breach indeed occurs.
Furthermore, the description of the reasons for the potential disruption needs to be carefully considered, given that a detailed analysis of those reasons is unlikely to have been conducted at this early stage. It should be kept in mind that subsequent deviations from such explanations (which may come to light upon investigation) may have a negative impact on that business’ case in a future dispute.
Secondly, it is imperative to carefully review the relevant contract. The contract may include clauses, such as a force majeure clause, which could be relevant and may ‘ if triggered ‘ absolve or reduce the business’ liability. However, it is important to identify such clauses and consider in advance whether the anticipated (or actual) scenario indeed falls within their scope and whether the typically numerous requirements of such clauses are satisfied. The devil is often in the detail and wrongful reliance on such clauses may lead to adverse consequences.
If your counterparties are unable to fulfil the contract
Where a business has not been informed that its counterparty may be unable to perform the contract, but suspects that to be the case, it makes sense to confirm the position in order to plan ahead. This can be achieved by requesting clarity from the counterparty. In the case that the counterparty confirms that they may or will be unable to fulfil their obligations under the contract, there are several things businesses should consider. Firstly, responses to such notices should be carefully considered, as an erroneous response may
lead to a waiver of its rights or an inadvertent acceptance of the repudiatory breach. Either outcome may harm its entitlement to damages or other remedies. Secondly, if the notifying party appears to rely on contractual clauses, such reliance should be carefully scrutinised, by the businesses, and any objections need to be raised promptly. Thirdly, statements which may give rise to estoppel arguments should be avoided. For example, if the response leads the other party to believe that the business will not enforce its contractual rights, then it may be prevented from doing so at a later stage. It should expressly reserve its rights regarding the potential breach as this will help businesses strengthen their case against their counterparty.
Seeking advice early is key
The tactics and communications deployed in the embryonic stages of the dispute can determine its outcome, thus it is vital that businesses seek legal advice at an early stage of the potential dispute.
James Arnold, Associate, and Mikhail Vishnyakov, Counsel, both at Cooke, Young and Keidan.“
