Supply chain issues and force majeure clauses

Many businesses have been disrupted by the Covid-19 pandemic as production levels have dropped and suppliers have struggled to meet demand.

As many businesses continue to suffer as a result of staff shortages and supply issues, leaving many customers in a difficult position, we expect to see more disputes over whether the Covid-19 pandemic has triggered a force majeure clause or frustrated a contract.

Unhappy customers facing delays and unable to meet the demands of their end-customers may look at the termination provisions in their contracts and source goods from elsewhere to fulfil orders.

Suppliers unable to fulfil orders will look at whether the contract excuses them from delay and whether delivery times can be extended.

What are the implications if you fail to perform your obligations under a contract?

If you fail to perform your obligations under a contract you will be liable in damages to the other party, unless you’re prevented from doing so by events or circumstances outside of your reasonable control and the contract contains express provisions suspending (and possibly bringing to an end) your obligations to perform (called a force majeure clause).

If a force majeure clause is triggered, the corresponding obligations of the other party will be suspended and time for the performance of their obligations will be extended to the same extent.  

Alternatively, if a frustrating event has occurred, the contract may be automatically discharged and if so, you are no longer bound to perform your obligations under the contract.

Termination must be carefully considered because if you terminate a contract when you didn’t have the right to do so you may give the other party the right to bring a damages claim against you.