Supply Contracts in the Spotlight: Rights and Obligations under Existing Contracts
Many businesses are under pressure to meet obligations under existing, and sometimes long standing, supply contracts in circumstances where rising fuel prices and disrupted supply chains are making it difficult to do so.
What rights and obligations do parties have where supply chain disruptions are impacting their (or another party’s) ability to meet obligations under a contract?
The ability to terminate an existing contract will depend on the terms of the agreement and the interpretation of those terms. Some key considerations are set out below.
Force Majeure
A force majeure clause may excuse a party from a failure to perform a key contractual term where that failure is caused by events outside a party’s reasonable control. The clause may include a right to terminate the contract if the event extends over a specified period of time.
Force majeure clauses often concern events, such as natural disasters, that make it impossible to perform the contract.
However, the benefit of a force majeure clause will generally only apply where performance is prevented and not where performance has simply become more costly or inconvenient.
Frustration
If the contract does not include an express force majeure clause, the common law doctrine of frustration may apply. This may permit termination of a contract if an event outside the control of the parties fundamentally changes the nature of the agreement.
Repudiation / Breach
A party repudiates an agreement if it demonstrates an intention to no longer be bound by the terms of the agreement or refuses fulfil its obligations under the contract. The other party may accept the repudiation and terminate the agreement.
Similarly, a failure by one party to meet its obligations under the agreement may give the other party a right to terminate the contract where the breach involves an essential term, of the contract or causes significant harm or loss to the other party.
Insolvency
Many long-term contracts include provisions allowing termination if one party becomes insolvent.
Termination for Convenience
Some contracts include a "termination for convenience" clause, which allows one or both parties to end the agreement without needing to provide a specific reason. To be enforceable, these clauses must be clearly outlined in the contract and should be fair to both parties.
Key Considerations
When considering termination, it is crucial to review the specific terms of the contract and comply with any procedural requirements, such as providing written notice.
Business owners should also be aware of the potential consequences of termination, including liability for damages.
If fuel costs and supply chain disruptions are impacting your business, seek advice early on your rights and obligations under existing contracts.
Now may also be a good time to review your standard term contracts.
If you need advice navigating your rights and obligations under a contract, please contact Heather Richardson.
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