Laura Baucus, director of the automotive industry group of the Dykema law firm, advises how companies can protect their contracts with suppliers, and how they should respond when supply issues arise.
Supply lines between manufacturers, suppliers and customers aren’t as threatened as they were during the height of the COVID-19 pandemic, but another disruptive event — Russia’s invasion of Ukraine, concern over a railway strike, Hurricane Ian — seems to come along every month, Baucus says. “It’s one on top of another.”
Even in less dire circumstances, companies need to take greater care in crafting effective contracts with suppliers. First, says Baucus, they need to make sure that their rights and obligations under the contract are unambiguous. With that step alone, “you’re 80% of the way there.”
Parties to the contract should seek to incorporate terms that are specific to their situation and level of supply chain risk. In particular, they should look at delivery terms and penalties in the event of non-performance. And while it’s impossible to include all potential disruptive events, companies should make sure that the language in the contract is “very targeted.”
The second thing to focus on is force majeure, a term that describes disruptive events that are beyond the control of the contracting parties. Baucus says that provision is crucial to mitigating liability and limiting damages in the event of interrupted supply. Too many companies throw it into the contract as boilerplate language, without being aware of its true implications. Especially in light of events of the last two and half years, “you want to refresh it yet again.”
The same care with regard to force majeure should be exercised in contracts with suppliers upstream and customers downstream. In the case of the latter, “when you get a [force majeure] notice from them, you can kick something back to them relatively quickly that preserves your rights.”
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