Existence and Consequences of Supply Chain Disruptions
The supply chain of a product includes the organization around it. Suppose a disruption occurs by the suppliers of the product parts or the distributor who markets and delivers the products to the customer. In that case, this represents a disruption in the flow of production of the goods, which in turn can have significant economic consequences. The disruption of the supply chain, operations, and production leads to delays and enormous sales losses and consequently affects the delivery to consumers. This interruption can be triggered by a global pandemic, natural disaster or the delivery of defective goods, among other things.
As a result of the still ongoing Coronavirus pandemic, our economy currently has to contend with a large number of restrictions, and they have a significant impact on supply chains. Furthermore, the economy is still suffering from border or plant closures and employee absences. The restrictions in place since the pandemic have impacted every level of trade over time.
At the beginning of the pandemic, there was a disruption in the supply chain due to the high demand for toilet paper. However, this did not result in a substantial negative impact. The microchip crisis is currently a different story. Highly topical is the production problem in the automotive industry, which was triggered in particular by the shortage of microchips.
Possible Courses of Action for a Company
If you as a company are affected by the interruption of a supply chain, you should react to it as quickly as possible and check your rights and contractual obligations. We also recommend that you prepare for the interruption of a supply chain by taking precautionary measures to reduce the impact of the disruption on the production flow.
If a supply chain disruption has already occurred, we advise you to take the following steps:
- Check the applicable law: is German or foreign law applicable?
- Review of contracts: What has been contractually agreed with suppliers, service providers and customers. Which requirements do you have to fulfil, and what are the consequences in case of a breach of duty?
- Contacting the contractual partners: Inform them that there is a break in the supply chain and, therefore, a breach of duty.
- Conduct negotiations to find a mutually agreeable solution.
- Document the circumstances: You may have to meet the burden of proof. Therefore, document impairments and collect appropriate documentation.
The latter point is essential in the case of force majeure. Such a case is referred to when circumstances exist that could not have been foreseen and prevented. These must be sudden circumstances external to the company, such as natural disasters, wars, pandemics, etc.
Also, a company can already develop preventive plans to be used if a supply chain disruption occurs. This action enables the negative consequences of such an event to be reduced. The following measures are possible as part of this:
- Securing goods or components needed for production to continue operating despite a supply chain disruption,
- Recourse to suppliers who can step in as an alternative. We recommend that you look around internationally and also purchase products from suppliers in different countries. In this way, you can turn to other suppliers in the event of regional or country-specific restrictions. In this way, the risk of disruption is inhibited.
- Establish a budget for such situations.
Schlun & Elseven Rechtsanwälte will be happy to advise you on your case and discuss preventive measures and your options for action should a supply chain disruption occur. Contact us today via our online form to take advantage of our services as soon as possible.
In the event of a supply chain disruption, your company should have the contracts concluded with suppliers, service providers and customers reviewed by a lawyer. This action is essential because a company is often no longer able to fulfil its obligation to perform in full, on time or at all. During such events, the question arises as to what consequences the delay or non-performance may have. This problem also occurs for suppliers. In the following, we will go into the legal implications or possibilities and explain which other aspects must be considered by companies, suppliers and consumers.
The obligation to hand over and transfer ownership of an object of purchase arises from § 433 (1) German Civil Code (BGB). The contractual partner of the buyer must fulfil this obligation. Due to the disruption of supply chains caused by the pandemic, many companies are unable to deliver goods to their customers on time or at all. Whether this constitutes a breach of contractual obligations depends on the individual agreements.
In the case of the Corona pandemic, “suppliers must now consider “impossibility,” according to § 275 BGB. If it is impossible for the contractual partner to provide the service, the obligation to perform may lapse. In the course of this, however, the entitlement to the counter-performance is also lost, whereby this – in the case of a counter-performance already rendered – must be returned.
If there is no impossibility, § 313 BGB could be consulted. According to the aforementioned standard, a disturbance of the basis of the contract is given if circumstances that have become the basis of the agreement have changed seriously after the conclusion of the contract, and the parties would not have concluded the contract or would have concluded it differently under this aspect. This gives rise to the possibility of adjusting the contract and, under certain circumstances, the right to rescind or terminate it.
Concerning the pandemic, it should also be considered that many contracts contain clauses that, among other things, regulate the case of force majeure. It is therefore advisable to consult an expert. Our contract law practice group will be happy to assist you in reviewing your contracts and work with you on possible responses or courses of action.
The Supply Chain Due Diligence Law
In the course of this article, we would like to draw your attention to the Supply Chain Due Diligence Act (LkSG). This law will come into force on 01.01.2023 and is intended to improve the international human rights situation. We would be happy to explain the law and its impact on your company. Don’t hesitate to get in touch with us via our online form.
Legal Advice from Schlun & Elseven Rechtsanwälte
The information provided in this article is of a general nature. For further information and legal advice, please do not hesitate to contact the legal team at Schlun & Elseven. We are your reliable and competent partner for all questions regarding contract law and other areas of law.
Schlun & Elseven Rechtsanwälte is a multidisciplinary and full-service law firm. With offices in Cologne, Aachen and Düsseldorf as well as conference rooms in Hamburg, Berlin, Stuttgart, Frankfurt and Munich, we operate nationwide and are always at your service. Our attorneys advise you in German, English and other languages. Call us, send us an e-mail or use our online form – we will be happy to give you an overview of your options as part of an initial assessment.