Do you need to negotiate your supply contracts?

Negotiating for supply chain disruption during the pandemic

Author – Natalie Young

A few years ago, it would have been hard to imagine the number of factors outside any individual’s control that are causing chaos along supply chains. But for Australian business owners and company directors, the following scenario is no longer far-fetched:

The delivery is late again. If it’s not reduced capacity at the manufacturer, it’s staff shortages at the warehouse, shipping hold-ups, or delays at the port. Drivers are off work and you’d try air freight, but there are no pallets (or wood to make them) for when your goods arrive at the airport. Your customer has been on the phone to you daily because their customers are demanding the goods.

As what was ‘unforeseeable’ becomes the ‘new normal’, it’s important not to count on force majeure or ‘Act of God’ clauses to excuse late delivery or failed performance. And to consider ways of protecting yourself against future disruption as you enter new agreements.

Don’t rely on ‘excuses’

At the outset of the pandemic that is COVID-19, Pryor Tzannes & Wallis’s Sydney-based commercial lawyers started revising contracts to include force majeure provisions. Such provisions, specifying that events beyond a supplier’s control could excuse failed performance by the supplier, were to offer some protection for our clients against the delays and frustrations they would no doubt experience as the shutdowns and isolations gathered momentum.

Now after a second year of pandemic-related delays, losses and broken promises, and with supply chains continuing to be disrupted at every level, COVID-19 is more and more unlikely to be accepted by customers as an excuse for a late delivery or failed performance.

In the courts, over the past year, we have seen commercial parties fighting to avoid liability for losses arising when they break a contract due to COVID-19. This is costly. And it will all come down to what are the specific words in the contract.

‘Old’ contracts pre-dating 2020 may have a force majeure clause that includes the word ‘epidemic’ or ‘pandemic’. Those that contract lawyers drafted and negotiated over 2020 to 2021 may expressly include COVID-19 related events or circumstances in the force majeure clause.

In 2022, if you are entering into a commercial arrangement, particularly involving the supply of goods or services, you can expect to see COVID-19 related events expressly excluded from force majeure. In some cases, force majeure has been entirely removed.

Who pays for COVID disruption in 2022 and beyond?

New commercial contracts are creating a situation where the risk of delay or failure due to unforeseen or uncontrollable circumstances is one the supplier must bear. As the supplier, if you fail to supply or meet the timetable for supply, it will be at your cost. COVID-19 simply becomes another risk of doing business that the supplier must factor into the cost of supply equation.

Such changes to managing COVID-related risk are pushing the cost of supply upwards. Consumers can expect to pay more for the goods and services they buy. The big customers also seem willing to pay more, provided they get what they want, when they want it.

This attitude of paying ‘whatever it takes’ also means the supplier is expected to pay whatever it costs to source the goods contracted for and get them delivered. If the supplier hasn’t factored the potentially significant cost differences into the equation when setting the purchase price, it is the supplier who will pay.

Remember, if there is no force majeure clause covering COVID-related supply disruptions, the supplier will be expected to perform its obligations regardless.

Consider alternative sources of supply

In practice, costs might escalate in several ways.

If shipping is too slow, or there are no containers available, air freight will be expected.

Let’s say the manufacturer is closed, out of business, or suffering staff shortages and can’t provide the goods. The supplier is expected to seek alternative sources of supply. If this costs more, it will be the supplier’s cost to bear.

If the supplier cannot find alternative sources or transport options and delivers too late or not at all, the supplier will pay the customer’s costs of sourcing an alternative supply.

As a supplier operating in the current environment, it is critical to factor these risks and costs into your commercial terms. And ultimately into the price. As we have already indicated, don’t count on being excused, even if delays are out of your control. You may find yourself the next case before the Supreme Court arguing the terms of your contract.

New commercial contracts: be careful what you promise

Once upon a time, back in 2019, agreements were something the parties negotiated. Even when things were agreed, documented and signed off in a contract, the parties knew that if circumstances changed they could negotiate variations or amendments. The terms eventually arrived at were ones that worked for both sides.

Fast forward to 2022 and the story has changed. Customers are making demands. Inflexibility is the new norm. People are tired of waiting and putting their lives, and their businesses, on hold. They are much less willing to be flexible or accommodating when goods are unavailable or late ‘due to COVID’.

If you are a supplier and you have kept your business afloat for the past two years you, too, are probably tired of waiting. You are ready to steam ahead. You have just tendered for a big contract, or established a relationship with that big customer who is going to be worth a lot of money to your business. But the customer insists on striking out COVID-relief clauses in new agreements, or specifying that COVID-19 is now a foreseeable risk and no longer an excuse for late or failed performance. What do you do?

It’s tempting just to sign up to the terms the customer is asking for. There must be a way to meet the delivery schedule, source those goods. Surely things are going to be better now the lockdowns are over?

Unfortunately this is not what we are seeing. Supply disruptions persist. There is no timetable or guarantee that certainty or availability and the free flow of goods in the supply chain will be normalised any time soon.

Cool heads can still prevail in contract negotiations

Fortunately, there is some light at the end of the tunnel. With a good lawyer ready to argue your case, and inject some cool-headed reasonableness into the equation, most customers will now accept some delay in a supply contract, provided the supplier takes the risk that the goods will get there somehow, someway, in the end.

As experienced contract lawyers, at PTW we strongly recommend building time and cost margins into your commercial arrangements. Consider what would enable you to meet the customer’s demands and deliver what has been contracted for on time, without the need to fall back on force majeure or COVID-19. It is unlikely that big customer will be forgiving.

Risk-check your business

If you are feeling that the pressures of COVID-related disruption and delay are unrelenting, you are certainly not alone. The International Chamber of Commerce recently launched a Save our SME’s program. As well as targeting government support, it called on large corporates and multinationals to protect their supply chains and pointed out the long-term benefits of preserving their supplier relationships.

In the meantime, seek the advice of our Sydney contract lawyers if you are unsure that your supply contracts are going to work for you in the current environment. At the very least seek advice about who is going to pay the cost of COVID-related delays and disruptions in your business and minimise the risk that it might be you.

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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