COVID-19: SUPPLY CHAIN DISRUPTION AND THE NEED FOR DISPUTE RESOLUTION SPECIALISM | The Daily Star
12:00 AM, July 21, 2020 / LAST MODIFIED: 12:00 AM, July 21, 2020

COVID-19: SUPPLY CHAIN DISRUPTION AND THE NEED FOR DISPUTE RESOLUTION SPECIALISM

We are going through the crisis of the century faced by the mankind due to the outbreak of Covid-19 pandemic. Most of the countries are implementing drastic lockdown measures as well as travel restrictions, which are creating serious supply-chain disruptions, production delays and distribution slowdowns, resulting in major impediments for many businesses that depend on international supplies.

Since the ease of the lockdown situation, Bangladesh's apparel industry has been going through a common problem of negotiation of contractual terms. The widespread disruption brought about by the COVID-19 outbreak has compelled companies to consider invoking "force majeure" clauses – a provision, that may exempt them from performing contractual obligations, if successfully pleaded.  At first glance, this might seem like an attractive option. In practice, the threshold for establishing force majeure is high. The "Act of God" or "Force Majeure" clauses that cover a range of events such as floods and earthquakes are designed to help insulate firms from the shock of the unforeseen.

The structuring of force majeure clauses in particular, and the allocation of risks in contracts more generally, will no doubt be given a great deal more thought in the future as lessons are learned from the impact of COVID-19.

Immediate concerns, however, should be around how the impact of the virus on the existing supply chain can be borne with and whether the force majeure provisions available in such contracts will be capable of being enforced.  An international sale and supply contract may also have applicable law and causation issues, Covid-19 itself may not be the reason to prevent performance, there may be other options to perform, albeit, expensive.

Hence, one needs to find the specific consequences of Covid-19 on a particular contractual performance – did it hinder or prevent performance?  The relevant date of entering into contract would be crucial to find the reasonable anticipation of Covid-19 as a force majeure event, the effectiveness of the clause often requires giving notice of failure to perform to the other side and there is a duty to mitigate as well. One should also look at payment impact before claiming force majeure. Had the payment already fallen due?

If this contention fails or there is no force majeure clause in a contract, a plea of frustration may be made but that has an even higher threshold – performance of a contract must have become impossible, illegal or radically different from what the parties originally bargained for. Moreover, this may be pleaded for contracts entered into before Covid-19 for it to be considered as a frustrating event and must not be in the contemplation of the parties at the time of entering into the contract.

At any rate a comprehensive Act such as the one passed in Singapore, namely Covid-19 (Temporary Measures) Act, 2020 would have allayed doubts about Covid-19 being a force majeure event, giving the parties relief from performance of contracts, made renegotiation easier, fairer, and taken care of limitation periods prescribed under general and special laws.

Our RMG sector that contributes to over 80% of our export revenue is now forecasted to face loss of payment of over US$3 Billion for products already made and the cumulative liability for unfinished products reaching US$10 Billion due to importers and foreign buyers taking advantage of the loosely formulated contracts by renegotiating their previously confirmed orders at a much lesser price, compelling the manufacturers and suppliers to haplessly agree to arbitrary terms.

In the recent years, many buyers also took advantage of inequality of bargaining powers making suppliers agree only on the basis of purchase orders without resorting to traditional payment of methods by letters of credit or without even offering a sales contract leaving suppliers without much legal safeguards.  There are further complications created by deferred payment mechanisms.

Our RMG industry needs to take some urgent actions. Contractual disputes with foreign parties are likely to open floodgates but the question is, do we have the power to bargain or test these claims through litigation?  With almost 4 million pending cases and a dearth of judges, and only a handful of courts operating remotely, here our best option must be to have resort to alternative dispute resolution (ADR) measures. There should be efficient, structured, integrative and collaborative negotiation to review the respective obligations to save the contract and to maintain future relationship, failing which one may opt for mediation or arbitration. There are the New York Convention 1958 for arbitration and the Singapore Convention 2019 for mediation to deal effectively by recognition and enforcement of cross border settlements involving foreign parties. Bangladesh is yet to be a signatory to the Singapore Convention. This needs to be considered at the earliest to save immense cost of litigation or even arbitration. Even if a contract does not have an ADR clause, there is no bar to resort to ADR if the parties concerned agree to it mutually even after the dispute arises (which, in any event, ought to be the most sensible decision in the current crisis).

The necessity to use online platform need not be reiterated. There is fast, efficient, secure platform that is already doing wonders during this crisis. ADR measures also avoid the formality to change the legal rules. Efforts should also be made to make statute annexed ADR provisions such as in making money loan recovery more effective, implementing the amendment made to section 89 of the Code of Civil Procedure back in 2012 and making mediation mandatory in all civil suits. There should be cost implications for failing to reach a resolution or settlement through ADR without realistic efforts. Constant monitoring, taking effective measures including giving practice directions, dialogues between stakeholders, more activism ought to help our economy to recover in the coming days.

The impact of Covid-19 has just started to unfold and will evolve fast. We need to stay ahead of the curve and get ready with appropriate emergency assistance and post-crisis collaboration in different forms as appropriate. Every sector should cooperate for survival, restructuring and recovery. It is time for the dispute resolution specialists acting as peacemakers putting off their adversarial hats unless unavoidable, to take the lead when the survival of the mankind is at stake.

 

The writer is a Barrister and Advocate at the Supreme Court, Bangladesh and Head of Laws at London College of Legal

Studies (South).

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