Cross-sector industries and global supply chain are shaken by Corona

Market insights – Identify legal scope of action and critical supply chain activities

Cross-sector industries and global supply chain threaten to break down due to the Corona virus crisis. In addition, the crisis puts various branches massively under pressure and is heavily striking the labor factor, since laborers are forced or advised to stay home. Clients e.g. of major construction projects (generally applies to all branches and industries) are advised to assess their legal contractual framework in terms of Force Majeure (“Höhere Gewalt”) and in parallel identify critical path activities and operations to quickly initiate mitigation measures.

The legal assessment shall be triggered to obtain clarity regarding liability and legal scope of action and/or as a responsive action due to the fact of suppliers’ / service providers’ Force Majeure issue.

Many construction projects anticipate an explicit Force Majeure clause. If a Force Majeure clause is contractually agreed upon, it must be assessed for which services this clause will apply and if it is beneficial to invoke this clause (e.g. FIDIC Yellow Book SC 19.1). If no explicit Force Majeure clause is agreed upon, it is important to identify the applicable laws and regulations. Those may be national laws, such as the BGB in Germany, or the UN “convention on contracts for the international sale of goods” (CISG). Whereas article 79 CISG deals with uncontrollable and unforeseeable forces specifically, the German law does not contain such a regulation. Focusing on German regulations, clients rely upon general terms, such as § 275 or § 313 BGB or in the case of existing terms and conditions upon §§ 305 BGB and the following/et seqq.

The assessment should result in a clear identification of the legal scope of action which is based on:

  1. Review of the project contract elements (e.g. clauses, attachments, amendments) for the existence of explicit Force Majeure clauses in conjunction with the identification of project specific applicable laws and regulations dealing with the same matter
  2. Assessment of the situation in relation to possible disruptive Force Majeure events in the supply chain
  3. Outlook the enforceability of the Force Majeure clause, as well as a possible fair result.

Besides the legal assessment, it is important to not lose sight of the big picture: “The completion of the project with available and accessible resources”. It is therefore important to continuously identify risks or issues in the supply chain early on. This could be done with a dedicated task force in place or through an even closer collaboration of the purchasing, risk management and legal department as well as the project management/company.

The identification initiated in parallel serves to explore options to react and mitigate flexibly on short term and simultaneously, to recognize and prepare the mid-term ramp-up activities after certain crisis limitation have been overcome:

  1. Identification of open-off and recurring activities and the supplier / service company carrying them out
  2. Checking the activities against the current issued obstructions (e.g. Force Majeure events, performance hindrances) as well as the registered risk (e.g. bottlenecks) and issues (e.g. production downtimes)
  3. Measure and Analyze the impact on project scope (time, budget, completion and preservation)
  4. Identify and Evaluate mitigation measures (e.g. different supplier, alternative sources, legal actions, postponing or bringing forward activities, acceleration measures, provisional measures, capital market optimization, self-execution/-production)
  5. Implement the most effective mitigation measures and continuously control their impact

As laid out above, the identification and legal assessment for a single e.g. construction project shouldn’t be carried out independently of the architecture of the entire supply chain / production and the clients’ business strategy.

In this turbulent time with several disruptions in project execution our team is available for a sparring and strong partnership.