It has been just over two years since our world came to a virtual standstill due to the newly bourgeoning COVID-19 pandemic. Little did the world know that the pandemic would wreak havoc on society for the ensuing two years and likely beyond. While COVID-19 has resulted in several long-lasting societal impacts, perhaps the longest lasting impact is, and will be, the pandemic’s impact on global supply chains.

“The pandemic has shown us that global supply chains are a huge house of cards: fragile enough on a good day, but prone to come tumbling down when there’s an unexpected breeze.” McGillivray, Glenn, ”An expert explains: How COVID-19 exposed the fragility of global supply chains,” World Economic Forum, July 30, 2021. Indeed, “shortages of essential … goods and materials during the COVID-19 pandemic have dramatically exposed the vulnerabilities of global supply chains.” Shih, W. Huckman, R., & Wyner, J., “The Challenge of Rebuilding U.S. Domestic Supply Chains,” Harvard Business Review, May 26, 2021.

COVID’s effects on global supply chains have served as a major inconvenience for consumers and retailers, but they have served, and will continue to serve, as a nightmare for manufacturers. This is particularly true for manufacturers situated in the middle, or that are at the mercy, of a global supply chain.

Initially, these issues stemmed from runs on items like toilet paper, hand sanitizer and run-of-the-mill surgical masks. Government shutdowns coupled with workers actually contracting COVID, being laid off or leaving the workforce compounded matters. Add to that an ice storm in Houston, flooding in Germany, and now, a conflict in Ukraine, and one has an outright crisis.

Each of these circumstances, and others, have led to delays at multiple points along several global supply chains. Experts do not see these delays abating or normalizing anytime soon. In fact, while “the current supply chain crisis may be temporary … volatility could well become a permanent feature of global trade as climate change and other disruptions take hold.” Langg, Christian, “How to stop supply chain issues disrupting the economic recovery,” World Economic Forum, Nov. 11, 2021.

This new reality will test, and may even topple, several tried-and-true business practices (read trade usage), including the just-in-time delivery model employed in several industries. Companies will need to assess their business practices going forward to adapt, and as they do, companies must be prepared to handle the legal impacts of the fits and starts of the new supply-chain environment.

The most basic and potentially most catastrophic legal impact of a supply chain delay is that companies may find themselves unable to perform under sales contracts that require them to supply certain quantities of items of a certain character in a short amount of time. This would be bad enough if the impact was simply on one customer, but in a supply-chain environment, the inability to perform will most likely have ripple effects down the supply chain. The result: line downs, significant delays, freight issues, and ongoing disputes between suppliers and their customers. Often, the legal exposure resulting from these issues amounts to millions of dollars per day of delay. It is therefore critical for businesses in these environments and facing these challenges to know their rights and responsibilities.

It is critical to understand that a business’ rights and responsibilities vis-a-vis its suppliers and customers in a supply chain stem from the terms and conditions of the contracts between them in conjunction with applicable law. More often than not, the parties will have reduced the terms and conditions of their agreements to writing, but often, the parties rely on boilerplate, borrowed or cobbled together forms. Certain clauses that are becoming more critical in today’s supply-chain environment have historically been, and thus often continue to be, neglected.

The parties’ written contracts (which may consist of multiple components) will typically include clauses that dictate what body of law applies to each relationship. Such clauses may dictate that a particular state’s laws apply generally, including its adopted version of the Uniform Commercial Code (UCC), or they may disclaim certain bodies of law such as the United Nations Convention on Contracts for the International Sale of Goods (CISG). Businesses should be thoughtful and should consult with knowledgeable legal counsel prior to negotiating with suppliers and customers in order to carefully bargain for a body of law acceptable, if not advantageous, to them. While two states’ UCCs may seem to be identical, a state’s courts may interpret similar language relating to things like commercial impracticability and force majeure quite differently leading to important business impacts.

Additionally, and critically, the written instruments will often contain so-called force majeure clauses dictating which unexpected and uncontrollable events will excuse performance under the agreement and which will not excuse performance when a supply chain breaks down. See, e.g., 1600 Walnut v. Cole Haan, No. 20-4223, (E.D. Pa. Mar. 30, 2021). Such events occur, and will continue to occur, frequently in light of the global supply chain issues outlined above. Sometimes, depending upon wording, force majeure clauses preclude businesses from making any excuse not specified in writing with respect to performance. Furthermore, these clauses often dictate the precise protocol businesses must follow in the face of an unexpected and uncontrollable event that impedes performance under the contract.

Poorly thought out or non-negotiated force majeure language can lead to disastrous consequences for manufacturers. Such language can lead to a sales agreement that, relatively speaking, represents a miniscule amount of company revenue leading to hundreds of millions of dollars in liability. This can be further compounded if frontline business people are not properly trained in how to follow directives in force majeure clauses and under applicable law and how to try to mitigate loss in the face of unexpected and uncontrollable impediments to performance, i.e., in the face of a force majeure. As with choice of law provisions, businesses should be thoughtful, should likely consult with knowledgeable legal counsel prior to negotiating, and should carefully bargain for acceptable force majeure terms. Moreover, companies should train workers to follow directives in force majeure clauses and under applicable law and should train them to do their best to mitigate loss in the face of these events.

Two other somewhat concomitant clauses critical to consider in today’s supply-chain environment are limitation of liability and indemnification clauses. These clauses address liability for incidental damages (think responsibility for line downs further along a supply chain) and whether businesses can look up a supply chain for indemnity for harm caused down a supply chain through no fault of the business’s own. This can lead to a business holding the proverbial bag for a line down or other incidental harm due to a supplier dropping the proverbial ball. Again, this can result in millions of dollars of unnecessary exposure and liability, and again, the answer is being thoughtful and consulting with knowledgeable legal counsel prior to negotiating, not to mention engaging with legal counsel as soon as something in the supply chain causes havoc.

Finally, U.S. courts are skeptical of excusing performance under a contract for price increases associated with supply-chain disruptions. Simple price increases will most often not qualify as an excuse, although they may if they are severe and are in some way caused by a force majeure. See generally 1 Corbin on Pennsylvania Contracts Section 74.06 [5] (2021). Likewise, customers may cancel orders or attempt to bring in last-minute pull-ins based on supply chain conditions that will make performance unduly burdensome. The answer to solving these problems is to work with knowledgeable counsel to build into your contract leeway for price fluctuations on raw materials, shipping, or other inputs and to limit customers’ abilities to alter orders with inadequate lead-time. Of course, if price fluctuations are incredibly high or unusual or if customer behavior is too onerous, it is best to consult with knowledgeable counsel to see if applicable law provides any relief.

In conclusion, today’s volatile supply-chain environment is, and for the foreseeable future will remain, a significant business challenge for manufacturers and particularly for those manufacturers nestled in the middle of one or more supply chains. Part of the business solution to these challenges is legal in nature and consists of giving real thought to, and educating workers about, contractual terms and conditions previously considered to be mere boilerplate. Finally, price controls and limits on customers’ abilities to act erratically are critical to consider. In that regard, businesses should seek legal counsel to minimize supply-chain-related risks at all stages of the contract life cycle from negotiation through performance. Finally, when circumstances become difficult and potentially litigious, businesses should involve legal counsel at the earliest opportunity to protect its interests and to help the business arrive at an economical solution as quickly and as efficiently as possible.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.