Navigating supply chain disputes and risk

Mel Tomlin, a Senior Associate in our Construction Engineering and Projects Team, attended the core conference at London International Disputes Week (LIDW) which brought together leaders from across the dispute resolution world to discuss the most topical issues of the moment.

This article draws together key insights made by high-profile panel members on the evolving risks to global supply chains and the legal challenges they present into today’s geopolitical and regulatory climate.

The distinguished panel which discussed this increasingly urgent and complex subject included:

• Mr Justice Henshaw (Judge in Charge of the Commercial Court of England & Wales),
• Richard Indge (Senior Managing Director, Ankura), 
• Natasha McCarthy (Counsel, Debevoise & Plimpton LLP), 
• Marc Merrill (General Counsel & Chief Compliance Officer, Uniper SE), and 
• Jeremy Wilson (Partner and Co-Chair of International Arbitration and Disputes Practice Group, Covington & Burling), as panel moderator. 

The discussion was framed in the context of businesses having to manage a broad array of interrelated threats, such as:

• cyber-attacks,
• the expanding use of sanctions and export controls as instruments of foreign policy, and
• heightened expectations around due diligence in relation to human rights and environmental standards,

 whilst grappling with:

• the growing demands for supply chain sustainability, 
• persistent volatility in global tariffs, and 
• a marked rise of disputes stemming from these disruptions. 

What are the key risks and challenges?

The panel reflected on key risks and challenges being faced in supply chains and how these issues are impacting the business and the wider industry. One panellist acknowledged that global supply chains have always had the potential to be complex and fraught with inherent risks (e.g. pandemics, natural disasters, changes in technologies and geopolitical tension); however, the level of connectivity and the speed of change in today’s world is such that the current global environment is exceedingly difficult to operate in. 

Three dramatic shocks to the global trading system were highlighted in the last five years: 

• COVID, where the global trade came to a screeching halt from one day to the next. 
• The Russian invasion of Ukraine, which had a major impact on supply chains, with the ever-increasing system of sanctions having a clear and present impact on business across the world. 
• The current global trade war conflict discussions, with the global system of trade that businesses have successfully operated in over the last few decades going away and becoming something new. There is a reordering of activity and trade flows throughout the world.

The key point is that this is very difficult because it brings a lot of uncertainty, as well as legal, regulatory and compliance risk. As such, this requires different risk mitigation strategies.

How can these issues be managed by businesses?

• Map out a risk identification process of what could happen and identify how that could impact a business and the different aspects of the supply chain.
• Try to draft specific clauses into contracts to address such risks. These should be clearly drafted to maximise the sort of clarity and risk allocation between the parties in order to minimise the risk of disputes emerging.
• Consider diversifying the business and supply chain. 

Are force majeure clauses the answer?

Often boilerplate force majeure provisions are likely to cover events or state affairs such as wars or natural disasters but another topical area is now import and export controls. If the clause makes specific reference or uses umbrella terms such as ‘acts of governments’, a claim may be possible but generally only where the relevant import or export controls are invoked unexpectedly and weren’t in existence when the contract was entered into. Force majeure provisions will typically only be invoked if the event has seriously impacted the party’s ability to perform the contract e.g. if there is an outright ban on the goods being imported.

Contrast this with the imposition of tariffs which increase the cost or burden of performance; this may be a more challenging argument to run. Bespoke drafting may be necessary to address such issues instead of relying upon the force majeure provision e.g. price escalation clauses, hardship clauses or material adverse change clauses. Other specific risks to consider, which might exist in a particular supply chain, include dealing with third party supplier failure or logistical issues that cause significant delays, such as port closures or customs delays. 

The final practical point that was made was that, often no matter how much thought and careful consideration has gone into the drafting and negotiation of contracts at the outset, often situations just change. Certain events are unforeseeable and it may be that a contract is no longer fit for purpose. It is always prudent to keep contracts in a supply chain under constant review to see whether there might be a need to renegotiate them before a dispute actually arises. An example given by a panellist was where there is an exclusivity provision in a contract which doesn’t give the necessary flexibility to seek an alternative supplier where supply chain diversification might be required.

Takeaways

In summary, risks that are facing global businesses have grown significantly in the last few years. 

The panel concluded that the idea of sharing best practices and ensuring that supply chain disruption is proactively addressed, and building resilience through diversification, is more critical than ever. 

Finally, thoughtful and robust contract drafting is key. Anticipating potential points of failure and embedding flexibility and protection into commercial agreements is essential to mitigating the legal and operational risks in these global supply chains.