Supply Chain Disruptions: Obtaining Effective Relief Through International Arbitration
In the life sciences industry, the supplier of a product under an international supply contract with a customer will often procure the raw materials needed for production from a sub-supplier. If the sub-supplier declares force majeure, for example because it cannot supply due to the COVID-19 pandemic, the impact of that supply disruption is certain to reverberate across the supply chain. This common scenario raises important questions about how companies can obtain effective relief.
Who is liable for the supply disruption and financial fallout? A declaration of force majeure by a sub-supplier may mean that the supplier in the middle of the supply chain lacks the raw materials necessary for production and thus must declare force majeure to its end customer. Each company wants to know who is liable for the resulting losses.
The answer depends on the specific supply problem, the underlying contract and the governing law. However, there are ways for each company to proactively manage the situation, including by identifying and documenting the root cause of supply problems, taking steps to overcome them (such as procuring replacement goods), analyzing the different aspects of a force majeure defense, properly issuing and responding to force majeure notices and allocating existing stock based on appropriate criteria.
Companies should also assess whether they can reach an amicable solution with both upstream and downstream partners to address the problems and damages caused by the force majeure event. This is faster and cheaper than litigating and is better suited to preserving business relationships.
How to obtain urgent protection? A supplier whose production is reduced due to a sub-supplier’s force majeure declaration may decide to allocate existing stock to its priority customers, while other customers may wish to force delivery of all or part of the available stock. In such a case, companies whose contracts provide for dispute resolution under the rules of major international arbitration institutions may be able to obtain relief from an emergency arbitrator.
Emergency arbitrator procedures depend on the specific institutional rules chosen, but most share the following features:
- Harm: Emergency relief typically requires a risk of substantial or irreparable harm, a likelihood of success on the merits, urgency and a balancing of interests. The chances of securing urgent relief increase if the supplier’s delivery failure causes more than just financial damage or if the allocation of remaining stock was driven mainly by profitability.
- Rapid procedure: Depending on the institution chosen, an emergency arbitrator typically issues a decision within two weeks from the date of receiving an application and following one or two exchanges of short written submissions and a telephone or video hearing.
- Binding decision: The emergency arbitrator’s decision binds the parties but is generally not enforceable abroad. In practice, however, parties often comply with such orders so as to avoid compromising their arbitration position.
How to avoid parallel proceedings? The supplier in the middle of a disrupted supply chain risks getting drawn into two parallel disputes. This could arise, for example, if the customer brings an arbitration for damages and, at the same time, the sub-supplier threatens the supplier with arbitration because the supplier has declared set-off with the losses it is incurring rather than paying the sub-supplier’s invoices. The risk of conflicting decisions and increased costs stemming from parallel arbitrations is undesirable for a supplier. Most leading arbitration rules provide a possible solution to this risk by allowing parties to either combine two arbitrations into one (consolidation) or include a third party in an arbitration (joinder).
While the major arbitration rules differ on the availability and requirements of consolidation and joinder, the following considerations are generally relevant for a supplier facing the prospect of parallel proceedings:
- Compatible clauses: There is a greater likelihood of consolidation or joinder when the arbitration clauses in each supply contract are compatible in terms of arbitration rules, the seat of arbitration, language and other procedural features.
- Party consent: In cases involving different contracts between different parties, some (but not all) arbitration rules require the consent of all parties, which could be withheld over concerns about sharing confidential information or the desire to nominate the arbitrator of their choice.
- Timing: Consolidation and joinder will generally be significantly more difficult once the tribunal in the first arbitration is constituted.
- Close links: The party requesting consolidation or joinder must typically show close factual, legal or logical links between the two cases and overcome concerns about delays and confidentiality.
These tips and tools are more fully addressed, along with an illustrative practical scenario, in a recent article for In Vivo, a well-regarded global publication in the life sciences space, which you find here: How to Obtain Effective Relief When a Global Pandemic Disrupts Your Supply Chain