Legal Ramifications of Construction Supply Chain Disruption

Desperate times require desperate measures, making the prospect of widespread lawsuits a reality.

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The COVID-19 pandemic has wreaked havoc upon supply chains around the world, requiring some companies to adjust operations, and others to permanently close their doors. The slowdown (and in some instances the stoppage) of commercial goods across state and governmental lines has not yet yielded large scale litigation as companies have been forced to find commercial solutions. However, winds of change are afoot.

Prevailing thought to date presumed there is little to gain from litigation as companies are still dependent on those same suppliers to help them stay afloat. However, as losses mount, companies have been re-evaluating the prospect of litigation. Desperate times require desperate measures, making the prospect of widespread lawsuits a reality. This prospect could potentially exacerbate the current supply chain woes making an already fragile situation even more tenuous.

To better analyze the role litigation may play, we first must assess what caused the slowdown in the first place. The global supply chain encompasses the network of industries and operations required to get products manufactured and distributed and into the hands of customers. The links in the chain include the production of components, the supply of labor, and the transportation of goods across borders. The global supply chain is buckling for many reasons, but experts agree that the biggest is the COVID-19 pandemic.

Legalities during a pandemic 

As soon as the pandemic broke, we witnessed massive, worldwide factory closures, yielding the displacement of workers and the crippling of production, resulting in the global supply shortage. This coincided with a sharp reduction in consumer demand for many products, sending economies around the world into recession. Workers in labor-heavy fields, such as construction, saw an increase in accidents, with many regulations being quietly lifted to maintain production levels. However, global demand for goods bounced back, fueled by the rapid development of COVID-19 vaccines, high levels of government assistance, and changed spending habits. The quick rebound in demand left processing plants, manufacturers and businesses struggling to keep up, and the problems began multiplying for reasons that extended well beyond the pandemic.

COVID-19 continues to constrict factories in Asia and make transportation and logistics more costly. Global warming chimed in, creating additional disruptions from hurricanes and other storms. Outdated infrastructure and a shortage of shipping containers added to the problem. Semiconductors and raw materials like rubber, lumber and steel remain dangerously low. Ports are backed up.

Further complicating the scenario, retirements and work-from-home setups have worsened existing shortages of essential workers, and now truck drivers in North America, and elsewhere, are using the threat of strike and gridlock to further compromise the delicate supply chain to rally against vaccine mandates, yielding a perfect storm of events working to bring down a system already on the brink of failure.

Demand surge changes the supply chain

It is well documented, that the United States came into the pandemic with barely adequate port capacity and truck fleets. Even if the pandemic had not occurred, the U.S. and other nations were not equipped to handle a burst of demand of this nature. The Wall Street Journal and the Los Angeles Times have reported that countries around the world have fallen out of sync in their response to the pandemic.

The United States, for example, has opened up far more than many nations in Asia that are still enduring lockdowns and other restrictions. With a global labor market towing the line, the various factors outlined above have insured that an untenable situation will get even worse, making it harder to get transportation workers to the ports where they are needed.

With all this in play, it seems litigation will provide the next assault to the already crumbling supply chain. Many supply contracts require the delivery of goods by a certain time. If the contract specifies delivery dates and quantities, or notes that they are “of the essence,” then strict compliance with the terms is typically required and failure to comply constitutes a breach of contract. If, however, the parties have routinely permitted partial shipments or delayed shipments, or if the contract permits them, then the course of performance or terms may not require strict compliance, and a breach of contract action may not be viable.

For these reasons, contracting parties should consider the specific terms of their contract and the historical course of performance while evaluating a breach of contract action.

Force majeure

The National Law Review has cited provisions involving, force majeure (unforeseeable circumstances that prevent a party from fulfilling a contract) as common contractual provisions that excuse performance under certain enumerated circumstances. All jurisdictions require the force majeure event to be specifically enumerated or to fall within a catchall provision. Courts generally construe force majeure provisions narrowly and general phrases in a force majeure provision, including “other similar events or causes” will be confined to things of the same kind or nature as the particular matters mentioned; whereas, “any other events or causes” may not be read as narrowly.

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Performance must be impossible (economic hardship is typically insufficient), although some courts have recognized commercial impracticability in rare cases. Some jurisdictions also require the event to be unforeseeable and outside of the breaching party’s control. With respect to supply chain disruptions arising from COVID-19, a breaching party will have the strongest defense if its contract expressly lists a pandemic, epidemic, or supply shortage as a force majeure event. Other express events that have been successfully invoked include “government orders,” and “natural disasters.”

If a contract does not contain a force majeure provision or if the provision does not include the type of event causing the breach, the common law can step in to fill the gap under the defenses of impossibility or frustration of purpose. However, in some jurisdictions, the existence of a force majeure provision could render the invocation of impossibility or frustration of purpose more difficult as courts will read the contract in its entirety and look for certain risk-shifting provisions to determine if the event was, in fact, unexpected or if it could have been, but was not, enumerated in a force majeure provision.

With the vulnerability of the supply chain in full view, and with its current shortcomings on display, mass lawsuits will not provide the short-term assistance we are all hoping for. As such, contracting parties should continue to work together to find reasonable commercial solutions to address supply chain disruptions from contractual breaches. Further, contract law imposes a duty to act in good faith and attempt to mitigate losses.

Any claims or defenses are also likely to be viewed through the lens of whether the party’s actions were commercially reasonable under the circumstances. As a result, even if litigation does become more common or appealing, parties should continue to communicate and work in good faith to resolve issues, as these steps will be beneficial for all parties, and all claims and defenses in the event of eventual litigation. Regardless, companies, suppliers and consumers should prepare for yet another onslaught upon the system. When all else fails, litigation is often the only remaining remedy, but it certainly will not provide the quick fix, we all agree, the problem demands.