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Managing Supply-Chain Fallout

Updated: Dec 22, 2021

Supply-chain disruptions have been making daily headlines for several months now. While the issues creating the disruptions may be out of your control, taking certain steps can help you manage the fallout plaguing your company and your customers, said Christopher Ng, managing partner at Gibbs Giden Locher Turner Senet & Wittbrodt LLP (Los Angeles).

In general, it is helpful to speak with the customers, distributors and manufacturers with which you have contracts to find workarounds to expedite solutions, Ng said. “Working together oftentimes is the best way to break the logjam.”

To help develop a well-thought-out strategy, Ng presented a five-point approach to understanding your rights and responsibilities and communicating with your customers at the November NACM STS Construction Credit Thought Leadership meeting.

Consult Counsel

Speaking with legal counsel that understands your industry and concerns can help find comprehensive solutions—not just legal answers, Ng pointed out. “In addition to the finance and the credit side, we try to have a holistic approach to some of these issues.”

If a situation is contentious and could end up in court, Ng cautioned against putting thoughts in writing such as emails or texts that are shared internally without including legal counsel. “It's not a bad idea to get legal counsel into the fold,” he said. “Theoretically, if a legal issue is pending, your communications are protected by attorney-client privilege. So, in certain cases, it does behoove you to bring your counsel in so that you can protect and privilege your communications and speak freely about problem solving and finding effective communication strategies with your customers.” Otherwise, in contested cases, internal communications could become evidence in a legal dispute, he said.

Review Your Contract

Consult your contract and make sure you understand the rights, duties and obligations between your company and your customer, Ng said.

  • Do you have a most-favored customer status clause that gives you the ability to make an allocation preference amongst your customers?

  • Do you have an enforceable output requirements contract that obligates you to fulfill the customer’s requirements?

  • What are the notice provisions?

  • What is your limitation of liability clauses or waivers of consequential damages?

  • What is your ability to terminate or suspend your obligations?

  • Do you have a price escalation or force majeure clause?

“If there is a price escalation clause, theoretically, in the event of a force majeure issue, shortage or unavailability then substitutions may be contractually permitted,” he said. “Delays in procuring those substitute materials may be forgiven and extend the contract time. So, this clause may be everything in a legal dispute.”

It is important to determine whether this current supply-chain chaos is a force majeure event, he added. “It probably is under most standard force majeure clauses, but not always. So, it's super important to understand all of the substantive provisions of your contracts that you are now trying to figure your way out of.”

Ng also explained the importance of the type of contract you use. A lot of subs and material suppliers do not have a formal contract form, he said. “Maybe all you do is exchange a [request for quotation], a quotation, a purchase order and an invoice, and those four documents are your ‘contract.’” When a formal contract is not used, there is always the potential for what is known as “the battle of the forms” between the seller and the buyer.

Review Governing Laws

If you do business on a purchase order invoice basis, “it's super important to understand how the UCC and battle of the forms sometimes shifts your rights, duties and obligations under the law,” Ng said.

State regulations vary by state so make sure you understand the laws in the state where you are operating and what is relevant to your company. For example, “Force Majeure, oftentimes, is not defined by the contract and may be defined by statute.” Ng outlined several sections of the Uniform Commercial Code that credit professionals should pay attention to:

  • UCC 2-615—Excuse by Failure of Presupposed Conditions

  • UCC 2-609— Right to Adequate Assurance of Performance

  • UCC 2-207—Additional Terms in Acceptance or Confirmation (Battle of the Forms)

  • UCC “Gap Fillers”—open price term, delivery in single lot or several lots, place for delivery, time for deliveries, notice of termination, open time for payment or running of credit

  • UCC 1-304—Obligation of Good Faith

A lot of clients and a lot of businesses are using UCC 2-615 and UCC 2-609, Ng said. For international sales, he directed credit professionals to the United Nation’s International Sale of Goods rules.

Be Fair and Reasonable, and Give Proper Notice

Judges and juries oftentimes look for “who acted in good faith, who has been dealing fairly, who's been reasonable, and that in my mind is massively understated,” Ng said. “You have this duty of good faith and fair dealing, which is omni present in all contractual relationships.”

Even if it is a force majeure event that provides some forgiveness, “typically you have an obligation to take reasonable steps to mitigate the other party’s loss,” he said. “You may have the obligation to call up your customer and give them their notice of impact and give them a list of substitute materials or expected delays so that, if necessary, they can go out and secure product from somewhere else.”

Make sure you give timely notice that there's a force majeure issue, that there's a condition that may delay performance, he added. “It is a good legal and a good business practice that you have timely given proper notice or seasonable notice to your customers in the event of a supply-chain issue.” This article first appeared in NACM eNews. It is used with permission.

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