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Supply Chain Delays and Contract Law

“… nor did Alice think it so very much out of the way to hear the Rabbit say to itself, `Oh dear! Oh dear! I shall be late!' (when she thought it over afterwards, it occurred to her that she ought to have wondered at this, but at the time it all seemed quite natural); …."

- Lewis Carroll Alice in Wonderland

The problem – a matter of perspective

The words “supply chain” have new meaning in 2023. Businesses in manufacturing and construction are failing because they cannot complete contracts on time and on cost given the post-Covid environment and uncertainties from trade wars and international supply limitations. From the perspective of the supplier, the cry is “it is not my fault” and when this arises, they turn to the fine print of the contract (often for the first time). From the perspective of their customer, they too turn to the contract in fear that they will in turn breach their agreement with their customers unless they can force the supplier to provide the good or services more quickly.

Wording of the contract is fundamental

The High Court has been clear over several decades that they will interpret the contract on its words and not on some basis of subjective fairness. The intention of the parties is resolved by looking at the words they use and not the words they wish they had used.

The lesson to be learned is that the time to look at terms and conditions is before they are needed.

Sometimes, however, the Court will intervene and imply words. By example, the High Court handed down a decision in March this year that looked at a sale of a hotel business which required the vendor to carry on business in “usual and ordinary course as regards its nature, scope and manner” pending settlement . The business sale was challenged in Court by the purchaser because Covid-19 had stopped the business from trading. The High Court said that a proper construction of the contract meant looking at the perspective of a reasonable business person and that this must have included “in accordance with the law”. The vendor ultimately won in the High Court – after having lost in the Court of Appeal of the Supreme Court of New South Wales in 2021 (Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6).

Is time truly of the essence?

The phrase “time is of the essence” is commonly found in contracts as a throwaway line towards the end of the terms and conditions.

From the perspective of the supplier, time should never be of the essence and indeed the terms and conditions should expressly state that estimates of time are not binding to avoid any implied term that the supplier must supply the goods/services on time or face the consequences. The supplier might, however, wish to see a clause saying that time is of the essence for payment of money but not otherwise.

Again, from the perspective of the customer, particularly where they are a business in their own right, they may wish to impose penalties or other consequences in an attempt to force suppliers to deliver goods on time.

Australian Consumer Law (“ACL”)

Section 62 of the ACL provides that where a supplier provides services to a customer and the time within which the services are to be supplied is not fixed or determined in an agreed manner, then there is a guarantee (in this context an implied term) that the services will be supplied within a reasonable time.

Frustration of a contract

The concept of frustration arises in Law where an unforeseen event beyond the control of a party makes it impossible for the contract to be complied with and the contract is ended. In 2020, lawyers raced for their textbooks to find out whether Covid-19 meant that suppliers could end their contract as being frustrated because of the pandemic. The answer was “no” - unless the terms and conditions of the contract expressly allowed for this. Again, the wording of terms and conditions is the key.

Force majeure

The phrase “force majeure” is a contractual right to end a contract in some circumstances beyond the control of a party. If the contract of the supplier does not allow for the circumstances, then they will not be able to end the contract (eg because other suppliers let them down or because of Covid-19). It is common to include industrial action, war and now pandemics in these clauses.

Extension of time clauses

Some contracts expressly allow the supplier to extend out time for compliance, often by giving written notice.

Termination for convenience

The ultimate fallback for provision where the contract may be silent on delay is for the supplier to seek to end the contract on short notice because it retained this right under the wording of the contract itself.

Whose terms and conditions apply

Sometimes there is a “battle of forms” and both supplier and customer seek to impose their own words. The Law generally resolves the issue of whose apply by testing at what point an offer was accepted by the other party. Once an offer is accepted then later words (eg on an invoice) are too late.

This article is a brief summary of a complex area that is very much contingent of the precise facts. It is therefore not a substitute for detailed legal advice. While the key concepts have application in other jurisdictions, the relevant Law is that of Victoria as at May 2023.

Photo: Chanaka 2023

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