Recent global economic uncertainty and supply chain instability are reshaping commercial litigation. Rising tariffs, shifting trade policy, congestion at ports, material shortages, and geopolitical disruption have turned routine procurement and manufacturing relationships into contested legal terrain. The result is a sharp increase in disputes centered on force majeure, breach of contract, anticipatory repudiation, and compliance failures, including those tied to modern slavery and human-rights issues. This article explains key legal fault lines, recent pressure points, and practical steps companies can take to mitigate risk.
Supply chain instability and trade uncertainty fuels litigation
Supply disruptions and volatile trade policies have spurred contract litigation, both by inhibiting contract performance and increasing incentives to litigate. In the past year, businesses have weathered a storm of volatile trade policies, including export controls on semiconductors (United States) and rare earth materials (China), ever-changing tariffs, and policies promoting onshoring or “friend-shoring” of labor and facilities.
In each instance, policy changes have led to overnight changes to material pricing, availability, and delivery timelines in the most-effected industries. In turn, certain suppliers (and sometimes, buyers) have suddenly found themselves physically or legally unable to perform their obligations – for example, a supplier may be prohibited from exporting a component, or from importing materials needed for manufacturing. In those situations, parties may find solace in their contract’s force majeure clause; or, failing that, in the Uniform Commercial Code (e.g., U.C.C. § 2-615), or the doctrines of impossibility, impracticability, and frustration of purpose.
More often, however, a new policy renders performance highly unprofitable or undesirable, but not literally impossible. For example, a supplier may be locked into a long-term requirements contract with its buyer, but finds that continuing to supply all that the buyer requires has become unprofitable or infeasible due to the cost or availability of materials. In these situations where there has been a significant impact on the economics of an agreement, parties are increasingly pursuing anticipatory breach and declaratory-judgment strategies to allocate economic risk early. The ensuing litigation often raises novel (and expensive-to-litigate) questions about whether the policy triggers the contract’s force majeure clause or otherwise merits equitable relief, with litigation strategy and outcomes further complicated by questions concerning cross-border choice-of-law and jurisdictional issues.
Companies can update force majeure clauses to moderate future disruptions
Force majeure entered the limelight during the Covid-19 pandemic, when many companies discovered that their existing protections were woefully insufficient protection against closed borders and social distancing. These provisions are once again front-and-center in recent supply chain disputes, with companies now relying on force majeure to allocate a broad range of disruption risks between the parties.
The utility of force majeure clauses is that they allow parties to contract for future events that are beyond the imagination of the contract’s drafters. Typical provisions cover a range of unspecified disruptive events, and require that such events only trigger the clause if they are unforeseeable or unavoidable, of a minimum magnitude, and the actual cause of a party’s nonperformance. Most clauses also require that the nonperforming party mitigate damages. But as with most contract provisions, the devil is the details, and recent commentary and case law emphasize three lessons when drafting a force majeure clause:
- First, although it is often advisable to define the triggering events broadly at the start of the clause, it is almost always advisable to ensure that events of particular concern to the business are specifically identified and included. For example, suppliers should consider specifically including government actions, tariffs, embargoes and export restrictions, labor stoppages, and pandemics as “force majeure events.”
- Second, the clause should require prompt notice to the opposite party once a triggering event has occurred, and specify the non-performing party’s mitigation obligations. Parties may also want to consider including streamlined dispute-resolution procedures, interim-relief provisions, and dispute escalation ladders to preserve commercial value and avoid expensive litigation.
- Third, an optimal risk management strategy rarely relies on force majeure alone. Instead, parties should consider nesting the force majeure provision within a broader framework of terms that are calibrated to address different risk thresholds, including terms regarding termination or suspension rights, price-adjustment mechanisms, the effect of material-adverse-changes, and negotiated extensions. The framework should also include a consideration of the ideal remedies and maximum allowable damages, including possible liquidated damages and/or a cap on consequential damages.
Anticipatory breach, mitigation, and other litigation tactics
Even with a well-crafted force majeure clause, companies still face difficult decisions and potential added liability in the periods immediately preceding and following invocation of force majeure.
On the front end, anticipatory breach claims are on the rise, as companies monitor partners’ financial and operational stability and make difficult judgments as to whether their partner can make good on its promises. And even when a counterparty admits that it cannot fulfill its promises, the aggrieved party must still decide whether to initiate a claim in short order, or offer concessions in hopes of partial performance. That calculus requires rapid factual investigation and careful contractual review because premature litigation can destroy valuable relationships, while delayed action can forfeit remedies. To aid in these calculations, parties are encouraged to include express, measurable performance triggers in their supply contracts, with automatic notice provided in the event that a trigger is activated. These early triggers allow early detection, which allows parties to explore strategic options like contract novation or substitution, and to better mitigate damages.
On the back end, once a company establishes that it will be unable to meet its obligations, it must immediately attempt to mitigate the resulting fallout. Courts expect parties to take reasonable steps to reduce damages, and documentation of contingency sourcing, communications with counterparties, and cost-avoidance efforts often sit at the crux of a court’s decision to award damages (and if so, how much). As such, parties are encouraged not only to actively mitigate their damages, but also to maintain contemporaneous documentation thoroughly detailing these efforts.
Although timely mitigation is important, pressure to mitigate contractual shortfalls by quickly sourcing new materials or shifting suppliers has its own hidden traps, including the risk that an insufficiently-vetted supplier may introduce forced labor or other labor abuses into a company’s supply chain. Businesses face two separate but overlapping potential exposures: contract claims from customers and partners regarding ethical sourcing obligations, and statutory or regulatory liability tied to modern-slavery disclosure and due-diligence requirements. As a result, a company that shortcuts diligence in favor of haste can find itself suffering the consequences, including indemnity claims against suppliers, rescission or price-reduction demands, and reputational harm. In order to help protect against these risks, companies are encouraged to implement tiered sourcing and inventory buffers for critical inputs, and to subject all new suppliers to appropriate diligence and continuing audits and certifications.
Conclusion
Global economic uncertainty and ongoing supply chain instability will continue to drive commercial disputes across force majeure, breach of contract, anticipatory repudiation, and compliance-related litigation. The most effective defense is forward-looking: clear, detailed contracts; robust documentation of mitigation; ethical-sourcing programs that reduce regulatory and reputational exposure; and dispute-avoidance mechanisms that keep commercial relationships intact where possible. With these measures, companies can help reduce the risk of a potential litigation time bomb and instead turn these circumstances into a more manageable commercial risk.