This article is intended as a quick legal guide of some key points for busy Energy executives who need to manage business risk exposure when global supply chains are disrupted.
The first step is to review the relevant supply chain contracts. These may span multiple jurisdictions with different legal codes, with some providing for arbitration and others mandating litigation in local courts. This analysis will expose risks but may also provide opportunities.
Do these contracts include provisions which excuse or suspend performance obligations, such as an express force majeure term? While force majeure is recognised in civil law jurisdictions and is written into the local civil law code, it is not part of the common law applicable in the United Kingdom and its former Commonwealth jurisdictions. This is important because civil law typically supplements the parties’ contractual provisions and applies force majeure provisions by default, common law applies the force majeure provisions only if they are contractually expressed.
Pre-pandemic, not all force majeure clauses were drafted with such matters in mind. If the pandemic’s effects do not obviously fit into categories of unforeseen risk, there is less scope for relief for the contract based on common law, as the doctrine of frustration is stricter in its application than the civil law concept of force majeure.
In contrast, Middle Eastern jurisdictions are generally based on a combination of common, civil, statutory and sharia law, which may supply additional remedies beyond those contractually provided. Emergency legislation in certain countries may add further layers of protection (or interference) with the parties’ contractual bargain.
Renegotiation of existing contracts
One mitigation strategy is to re-negotiate the basis of contractual arrangements to cater for the fractured supply chain. This may involve re-allocating risks of labour shortages and/or delayed delivery of components, with an extension of time and relief from liquidated damages subject to bearing the increased costs of resources needed to comply with local restrictions. Business needs to continue in a way that recognises the new realities of the post-pandemic economy.
New contractual frameworks
The need for stronger and more diverse supply chains with a larger number of suppliers in different locations is now apparent. Bespoke structuring of force majeure provisions should become the norm and more flexibility, allowing for the purchaser to switch to an alternative supplier.
If a formal dispute is inevitable, consider starting the process first, particularly where litigation in your counterparty’s local courts is undesirable. If you are invoking force majeure, prompt and preventative action is best practice. Alternatives, including partial performance should be considered. If you are resisting force majeure, communicate rejection notices promptly and remember duties to mitigate loss. Also consider whether your local court system can process the dispute timeously; the enforced closure of some Court buildings has caused a backlog in many jurisdictions whereas the main arbitral institutions have remained functional during the pandemic.
Jonathan Hosie and Pablo Ferrante, partners in the London and Houston offices respectively of international law firm Mayer Brown.