Responding to supply chain disruption in the construction sectorPrint publication
Supply chains in the construction sector are coming under pressure with increased price inflation and scarcity of products including roof tiles, steel joists and timber caused by a combination of factors arising out of Covid, Brexit and the March 2021 Suez Canal blockage. It is likely that the impact will continue to reverberate through supply chains at a time when construction activity is buoyant across the UK.
How can Walker Morris help?
Whilst the factual context of recent global events impacting supply chains and the scale of disruption may be extraordinary, the legal and practical implications of adverse events on businesses in the construction sector are not. Walker Morris have expertise in helping businesses operating in the construction sector to successfully navigate through supply chain challenges by providing key legal and commercial support to assist with avoiding disputes and keeping supplies moving. Please do not hesitate to contact us to discuss solutions to any supply chain issues you may be experiencing. Issues for businesses to consider including the following.
How should affected businesses respond?
- Producing and implement crisis plans to come into operation where critical supplies run short.
- Consider how best to deal with commercial counterparties and potentially also financial creditors, particularly where an event has resulted in contractual and/or financial breaches or default.
- Address building-in resilience, for the future. Commercially, that can involve:
- ‘shoring-up’ inventory (and not operating a ‘just-in-time’ supply chain), which may have an impact for logistical arrangements and storage capability;
- reducing or removing over-reliance on any one source or country of origin for vital supplies; and
- considering ‘on-shoring’ or ‘near-shoring’ supply chain components where possible.
What legal and practical advice arises?
As part of a business’ assessment of supply chain disruption on their commercial arrangements and financial viability, whether or not contracts or common law remedies allow the flexibility to renegotiate, or the ability to terminate, commitments will be key; as will the ability to avoid or mitigate disputes.
The following checklist of legal and practical advice should assist.
- Undertake a review of all key contracts to determine where contracts (and commercial relationships) might allow for flexibility and the ability to negotiate to ‘ride out’ a crisis, and where pressure points or breaking points arise. Where pressure points do arise, businesses should seek specialist advice on the options available, whether that be in relation to termination or suspension of contracts.
- As part of the contract review, ascertain the existence and terms of any force majeure provisions which may excuse one or more parties from contractual performance. Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should ensure compliance with any notification or other requirements, and any time-scales, specified within the particular contract, and should keep records of all relevant factual and economic evidence as the impact of the crisis unfolds.
- Where force majeure does not apply, businesses should take specialist advice as to whether the common law doctrine of frustration may assist to effectively terminate a contract.
- Parties should check their various insurance contracts. In some cases, invoking or receiving a force majeure or a frustration claim can impact insurance policies. In particular, parties should ascertain any notification requirements.
- Businesses should also ascertain the existence and implications of any other contractual provisions which may provide flexibility and/or commercial assistance. These might include (non-exhaustively) price adjustment clauses, variation/no-oral modification clauses, and material adverse change clauses.
- Commercial disruption, uncertainty, financial hardship, and contractual default can all prompt disputes. Businesses should therefore review contractual arrangements to ensure that they understand the extent of their, and their key counterparties’, obligations and liabilities. Key clauses in this context include any guarantees, indemnities or performance bonds, limitation/exclusion of liability clauses and any endeavours obligations.
- Where possible and financially feasible, parties should consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage. Again, parties should keep clear records of all factual and financial evidence upon which they might wish to rely in the event of any dispute.
- Where disputes do arise, parties should check whether the relevant contract contains any mandatory dispute resolution provisions. An effective dispute resolution clause requires the parties to follow a pre-agreed route to resolution, which can prevent any potential secondary dispute about whether and how the primary issue should be resolved; minimise the scope for any tactical game-playing (thereby helping to preserve commercial relationships); and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.
- Businesses should ensure that they keep open communication channels with staff, suppliers, customers and other key counterparties. Dialogue can minimise disruption or discord within a business and can often avoid or effectively resolve disputes, saving both commercial relationships and cash.