Dealing with the consequences of a disrupted supply chain

Jon-Paul Casati, an Associate in our Litigation Team, considers the impact of the current climate on supply chains.

The restrictions on travel, and government imposed national lockdowns caused by Covid-19 are likely to have far reaching and severe impacts on global supply chains in sectors such as manufacturing and consumer. Parties are and will continue to suffer financial loss and, or, face action against them for failing to fulfil obligations, or for breaches of contractual timeframes for the delivery of goods and services.

My colleague, Rob Coleridge, produced an article discussing the impact of Covid-19 on supply chains, emphasising the need for reformation of supply chains through the diversification of a business’ supplier portfolio to minimise the risks of catastrophic losses. This is sensible advice and will help businesses moving forward, but may not help with disputes that have already arisen.

Although businesses will be keen to maintain relationships with suppliers, and work towards practical, commercial solutions to problems in line with government guidance, on occasion litigation will be the inevitable result of a dispute. This is particularly the case in disputes which concern large supply chains where unpicking the nature of defaults and establishing liability is not straightforward.

There are added complexities surrounding cross-border disputes, such as may arise in an international supply chain. The starting point of choosing jurisdiction and law for these disputes can be difficult, particularly where the dispute involves multiple parties and, or, where there are no exclusive jurisdiction clauses contained in the contract(s) between the parties.

As the UK has not yet reached an agreement on the post Brexit rules governing jurisdiction in cross-border disputes and enforcement regimes with current EU Member States, this complexity is likely to be magnified. At the time of writing, Brexit talks between the UK and the EU appear to be at an impasse, and a no-deal Brexit continues to be the most likely exit. If parties are concerned about being able to enforce UK judgments in EU Member States, or if they already have a judgment against an EU entity, they should seek legal advice and should also consider taking immediate enforcement action to benefit from the certainty of the arrangements currently in place.

For more information regarding cross-border dispute options, please visit our FAQs on our Brexit Hub.

Owing, in part, to this uncertainty surrounding litigation, there is a growing trend for parties to consider arbitration to settle disputes. It is widely considered that Brexit will have a lesser impact on arbitration in comparison to litigation, as the enforcement of international arbitral awards is governed by the New York Convention, of which the UK’s membership is independent of the EU.

Further, London has long been considered as an international arbitration hub, attributed to the confidence in the English legal system, its impartiality, effectiveness, and principle of confidentiality in arbitral proceedings. Regardless of the outcome of Brexit negotiations it is unlikely that this will change.

If arbitration is the preferred method of resolving disputes, contracting parties should consider incorporating arbitration clauses into contracts as a way to deal with disputes and avoid the uncertainties of litigation. In doing so, parties should give careful consideration to choice of law and jurisdiction and include this in the agreement. The recent Supreme Court decision in the case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 serves as a timely reminder that parties should also be clear in their arbitration agreement which law they agree will govern any arbitration which may be used to resolve any disputes which may arise.

The importance of complying with arbitration agreements is discussed in a recent article by my colleagues Ailsa Anderson and Kate Williams.

It seems inevitable that disruption caused to supply chains by Covid-19 will result in an increasing number of contractual disputes over the next 12 to 18 months. When these problems arise, before pushing the button on litigation, parties should carefully consider their positions, including the option of arbitration or other alternative dispute resolution, as well as the steps that would need to be taken to enforce a court judgment in another jurisdiction if litigation is the preferred option.

Should you have any queries or comments regarding the subject matter of this article, please contact Jon-Paul Casati.