Supply Chain Disruptions: Drafting Contract Clauses to Mitigate Risks, Navigate a Breach, Avoid Litigation

Supply chains continue to be disrupted worldwide, requiring many companies to adjust operations and their business. Although companies are seeking commercial solutions to supply chain issues, litigation has been relatively subdued because companies recognize that there is little to gain from litigation when they are still dependent on the same suppliers for restocking and to stay in business. However, companies are reevaluating their contractual rights and defenses in anticipation of future litigation.

When a supply contract specifies delivery dates and quantities and includes fixed prices or notes that "time is of the essence," strict compliance with the terms is typically required and failure to comply constitutes a breach. However, if the parties have routinely permitted partial shipments or delayed shipments, or if the agreement allows for these variances, the course of performance or terms may not require strict compliance. Thus, a breach of contract action may not be viable. For these reasons, contracting parties should consider the specific terms of their contract and the historical performance when evaluating a breach of contract action.

Force majeure is typically found in supply contracts, but the details of this provision vary widely. Courts generally construe force majeure provisions narrowly. General phrases in a force majeure provision, including "other similar events or causes," will be confined to things of the same kind or nature as the particular matters mentioned. Typically, performance must be impossible and economic hardship is generally insufficient. Thus, counsel should take care and be as precise as possible when drafting force majeure clauses to ensure an enforceable defense in the event litigation ensues.

If a contract does not contain a force majeure provision or does not include events that may result in a breach, the UCC's doctrine of commercial impracticability (UCC 2-615) and/or the common law can excuse performance under the defenses of impossibility or frustration of purpose. However, in some jurisdictions, the existence of a force majeure provision could render the invocation of impracticability, impossibility, or frustration of purpose more difficult.

Listen as our expert panel discusses when a company suffering from a supply chain breakdown should bring a lawsuit. The panel will also discuss when it is in the best interests of the parties to work together to find reasonable solutions to address supply chain disruptions and how the parties can navigate resulting contractual breaches while also protecting their interests.