Cristina Rodriguez, senior counsel with the law firm of Wolfe Pincavage LLP, offers guidance on how suppliers and buyers should prepare for the inevitable contract disputes that arise from issues such as supply chain shortages arising from the COVID-19 pandemic.

The pandemic and related disruptions have led to an increase in contract disputes between suppliers and buyers over the past year, Rodriguez says. Parties to contracts have had to deal with a host of issues, including government restrictions on operations, labor shortages and cyber attacks. As a result, suppliers have found themselves unable to meet deadlines and requirements for filling orders, with some disputes raising questions about whether certain disruptions are covered by insurance.

The best way to resolve such disputes is to anticipate them, Rodriguez says. “Conflicts are going to arise in any supply chain relationship,” she adds, and companies need to plan for them. Contracts should include a resolution mechanism that includes such options as a formal complaints department, mediation with the help of a neutral third party, and finally arbitration. The last is often preferable to years of expensive litigation. It can be designed as a tiered process that scales in complexity with the amount of money involved, Rodriguez says.

Both mediation and arbitration involve the participation of a neutral third party, but the individual in the first instance is there to help the parties come to a workable solution, not impose one. With arbitration, by contrast, the arbitrator (who can be one or several individuals) hears the case and makes an award. In binding arbitration, the parties have agreed in advance to be bound by the arbitrator’s decision, while the non-binding variety is less formal, with the ruling subject to rejection by either or both.