8 December 2011 | William Soileau
The past few years have seen some major disruptions to increasingly complex global supply networks. While the contractual risks of such disruptions are not new, many purchasing managers have still not learned to manage them effectively.
Procurement contracts should leave purchasers flexibility to terminate suppliers and to claim paid-for raw materials, finished product, work in progress, and (more difficult) deposits, in the event of supplier bankruptcy. Purchasers should also include retention of rights, segregation requirements, and rights to reclaim tooling, designs and other intellectual property, either in your purchase contract or a separate tooling contract. But prevention is the best medicine. Pre-contractual due diligence and regular supplier reviews can help identify weak suppliers before crisis strikes. Warning signs may include requests for accelerated payment terms, restructuring, late deliveries or failing quality.
The tragic earthquake in Japan, the social upheaval of the Arab Spring and, most recently, the floods in Thailand, have tested traditional force majeure clauses to the limit. When a supplier is struck by such an event, force majeure clauses will typically excuse the supplier’s non-performance to you as buyer. But if you as a buyer are not directly affected by the event of force majeure, your performance as supplier to your own customers would not necessarily be excused.
Most force majeure clauses do not adequately address such indirect risks. The risks can be managed in part by adding flexible delivery and performance terms in your own conditions of sale and stipulating your performance will be excused by an event of force majeure affecting key suppliers.
Ensure your own sales contract contains a general exclusion for any unforeseeable/unavoidable events, rather than just a list of specific events. But force majeure clauses won’t restore sources of supply, or compensate for resulting losses. For large manufacturers, a supplier diversity programme is probably the best insurance.
☛ William Soileau works in the Shanghai office of international law firm Pinsent Masons.
