While certain factors cannot be controlled, particularly geopolitical instability and the effects of climate change, there are some steps that can be taken in order to mitigate risks. Our International Arbitration and Litigation team, who have acted on a multitude of cross-border and multi-jurisdictional disputes in circumstances where supply chains have failed. Below we set out some key considerations and top tips to ensure that your supply chain is protected to the extent possible.
Applicable law / jurisdiction clauses
Parties to a contract are free to choose the law that will govern their contract. However, particular attention should be given to whether or not (and the process by which) any foreign judgment can be recognised and enforced in England, and any English judgment can be recognised and enforced in foreign jurisdictions. This needs to be considered at the time the contract is entered into, as does where the counter-party has assets to be enforced against.
There are various regimes that govern the recognition and enforcement of court judgments, depending on where the judgment has been obtained and the date on which proceedings were commenced. Careful consideration should be given to the process by which such judgments are recognised and enforced in order to pre-empt problems. If there is no reciprocal agreement with the relevant jurisdiction, an arbitration clause may be the better option to enable enforcement. If you do not consider where the counter-party has assets, and the position in respect of enforcement of any court award or alternatively arbitration award, you can be left in a position where you have an award/judgment but getting it was pointless because you cannot enforce it. Our International Litigation and Arbitration team is able to advise on the appropriate jurisdiction/arbitration clause to ensure you can protect your rights and effectively enforce any judgment obtained.
Sanctions
Given the increasingly volatile geopolitical landscape, sanctions applied by one state against another, such as those applied to Russia following the invasion of Ukraine in February 2022, now threaten to exacerbate the fragility of supply chains. Risk can be managed better through pro-active consideration and management of relevant risks. In addition to this, ensuring compliance with sanctions regimes now create an extra layer of risk for companies with global supply chains.
While geopolitical risks can be difficult to predict, it is important that consideration is given to understanding the nature of a counter-party. Particularly, in circumstances where they operate in high risk sectors such as energy and petrochemicals. Contractual provisions can be agreed to seek to manage risks flowing from these issues – either where there is an increase in cost or the contract cannot be fulfilled. Furthermore, checks can be run in order to identify the nature of the party, the ultimate beneficial owners of a specific entity, directors and shareholders. Such checks are likely to help a party be more informed regarding the likelihood of sanctions affecting the contract.
Retention of title clauses
Retention of title clauses provide protection to sellers so that they can ensure that title to the goods does not pass to the buyer until full payment of the goods has been received. Such clauses also ensure that the seller, in circumstances where payment in full has not been received, is able to take possession of the goods without the need to immediately commence legal proceedings for non-payment of sums due.
It should, however, be noted that simply reserving title to the goods is insufficient in ensuring that title to the goods is retained. Further wording setting out that the seller has the right to repossess the goods (in the event of non-payment), a right for the seller to enter the buyer's premises to take control of the products and obligations, including the requirement to store the products separately, and marked as belonging to a third-party can also be included. This can provide further protection to the seller in the event payment for the goods is not forthcoming.
Credit management and checks
Prior to entering into long-term agreements, understanding your counterpart's financial situation is critical. Integrating an entity with financial difficulties into a supply chain threatens to destabilise the entire chain, i.e. a financially distressed entity may be unable to fulfil its obligations, which in turns prevents the manufacture of a particular good or product. Ensuring that your counterpart is in a healthy financial situation, and therefore able to fulfil its obligations, is as fundamental as is ensuring that this is appraised regularly. However, carrying out such checks can often prove to be more difficult. Especially in circumstances where the other party is situated in a foreign jurisdiction that does not provide the required level of transparency regarding a company's financial health. You should also consider undertaking regular credit checks during the lifetime of the contract and including the right to terminate the agreement if the supplier's credit worthiness falls.
DWF is able to assist with these issues by carrying out credit checks on both domestic and foreign entities. Such credit reports provide a far greater level of detail that the information available on public registrars.
Should any potential issues be highlighted by these reports, further steps can be taken in order to ensure that your supply chain is protected. This includes:
- Letters of credit – in essence, this a guarantee from a bank that a buyer's payment will be released to the seller once shipment has taken place.
- Parent company or bank guarantees – in circumstances where solvency may be an issue, it may be possible to obtain a guarantee from the company's parent company or bank. This ensures that any financial risks are mitigated and the supply chain is protected.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer sector and International Trade experts.
This insight was authored by Andrew Leach and Peter Photiou.
