How to mitigate broken supply chains and loss

In the wake of the latest lockdown, you may be experiencing disruption to your supply chains. If you’re not experiencing disruption yet, you might fear its imminent arrival. As a result, many businesses have started thinking about the mitigation of loss. What can you do if you think the other party in your contract is in breach or may end up in breach soon? What should you do if you yourself are unable to meet all of your contractual obligations? Elliot Fry, commercial solicitor at Cripps Pemberton Greenish, sets out some solutions…

Contractual Protection

The first step is to review your existing contracts. If they are well-drafted, you might be able to rely on specific provisions to help recover your losses.

If you are the client in this relationship, look out for a clause called ‘Customer Remedies’ (or something similar). It will set out your rights and explain what you are entitled to if your supplier has failed to deliver your goods or services in time. You may, for example, be able to:

  • terminate the contract and make no further payments;
  • recover the costs incurred in obtaining substitute goods or services from a different supplier; and/or
  • claim damages for other costs or losses incurred.

Your supplier might seek to rely on a ‘Force Majeure’ clause to escape their obligations, on the basis that government measures (such as lockdown restrictions) and other supply chain issues are outside of their control. Depending on how the clause is drafted, those circumstances may be specifically listed as ‘Force Majeure’ events. Despite this, as a customer you can argue that suppliers should still be avoiding or working around ‘Force Majeure’ events such as lockdown. Given that reports of a second lockdown had been circulating in the media prior to its announcement, you may be able to counter a ‘Force Majeure’ claim by asserting that suppliers should have already implemented measures to mitigate the effects.

If, on the other hand, you are the party potentially in breach, you may be seeking to rely on a ‘Force Majeure’ clause. Much will depend on how the clause is drafted, and should be backed up with practical and good faith discussions with the other side about how to manage these issues. You should also be prepared to demonstrate not just how these events have prevented you from complying with your obligations, but also what measures you have taken (or attempted) to prevent or mitigate this. Understanding your contractual rights can be tricky, and any deviation from compliance with your contract might put you in breach even if you feel you are the aggrieved party, so take legal advice before you rely on a Force Majeure clause to stop making payments or stop providing your goods or services. 

If you are entering into a new contract, or re-negotiating an existing one, review the obligations, remedies, and ‘Force Majeure’ provisions carefully to ensure they cover potential Covid-19 issues.

Practical Steps

If your contracts do not offer you the kind of protection described above, here are some practical steps that you can take to protect yourself:

Pre-emptive measures

Ideally, you would be able to mitigate your loss before it has even occurred. You could do this by stock-piling key materials or implementing a communication plan with your suppliers, or ensuring you have alternatives in place.

Insurance

It is possible that your policy covers you for losses arising from certain types of business interruption. Your insurance broker can advise you on what coverage you have in place, and premiums for additional coverage.

Tax

Consider how tax planning could help. Your accountants can also update and advise you on specific measures HMRC is making available to companies as a result of the pandemic.

Negotiate

If you are the party that has not been able to fulfil its obligations under a contract, the best solution will be to communicate clearly with the other side. It might sound obvious, but explaining your situation and offering an alternative solution can often be the best course of action.

Think long-term

Understandably, you will be anxious to ensure that your suppliers fulfil all of their obligations. Take legal advice if you think you or suppliers may be heading for troubled waters, but keep lines of communication open at all times. Consider mediation if you can’t easily resolve your issues. Court battles can be time consuming and expensive and for the most part are best avoided, but your solicitor should be able to help you do this.

For more information on contract drafting and negotiation, please contact Elliot Fry at elliot.fry@crippspg.co.uk or on +44 (0)1892 489 584