International Supply Chains – what happens when things go wrong?

In a global market, international supply chains are the life-blood of many organisations . Without the ability to source competitively priced materials and products from other jurisdictions, maintaining or increasing market share against overseas competitors is often not possible.  Price is not the only concern when buying materials and products from overseas; the reliability of the supply chain can be equally important.  Part of this is a matter of due diligence to ensure that your supplier has the capacity, reputation and management structure to provide the confidence that they will fulfil orders reliably, on time and without defects. 

Sometimes, however, despite rigorous investigations and vetting, the supply partner you appoint will not fulfil your expectations and requirements, leaving you potentially facing financial losses and embarrassment with your customers.  In case this happens, you will want to ensure that you have a carefully drafted contract providing you with the best protection and remedies to minimise the negative consequences of your supplier’s underperformance. 

For more detailed advice on this and other critical terms you need in your supply contracts, please contact our Commercial team. One clause you will want to be very clear upon is the clause deciding which law governs your contract and where your disputes will be determined.   Absent this, you could find yourself in a protracted dispute with your supply partner over which law and which Court governs the dispute, yours or theirs, before you even start discussing the substance of your claim.

For contracts between businesses established in EU member states, there are a set of regulations which will ultimately determine which law and Court will govern your contract if it is silent on this subject.  These are the Rome I Regulation on the law applicable to contractual obligations and the Brussels Regulations 2012 (save for Denmark).  Whether these Regulations will continue to apply to the UK and if so, in what form, will no doubt be revisited as part the government’s review of the nation’s relationship with the EU post-Brexit.  For contracts with states outside the EU, these questions are determined by reference to international treaties and English common law, and this can lead to complex and expensive disputes.

The easiest way to avoid, or at least minimise, these disputes is to have a simple clause in your contract electing to have a particular law govern your relationship and name the Court(s) which will determine your disputes.  For UK established business, you may be best placed electing to have your contract governed by English law , with the option (at your discretion) whether to bring proceedings against your supply partner in the UK or in an overseas Court.

If your supply partner only has assets based overseas, you may prefer to sue them in their home country rather than suing them in the UK first and then enforcing overseas.  Within the EU these clauses are generally enforced without question as a matter of EU law.

Outside the EU, it is still the case that many Courts will recognise the clauses and enforce them in accordance with the contracting parties’ intentions.  However, that is not always the case. In some jurisdictions, most notably China, local Courts may apply local law even if the contract states another law should apply.  It is always advisable therefore when you are entering a supply contract with a company based outside the EU, in a jurisdiction with which you are not familiar, to obtain local advice on whether your contract will be enforced by the local Courts in the manner that you intended.