The current shortage of raw materials and the difficulty in obtaining them and components, together with a significant increase in their price is causing serious problems for companies and making it hard for them to fulfil their ongoing contracts. This is slowing down the recovery in a period that is already very difficult.
In this guest post, Silvia Bortolotti, partner at BBM Buffa, Bortolotti & Mathis in Italy, talks us through some of the options available to sellers or exporters from a legal perspective.
Possible delays in delivery caused by difficulties in obtaining raw materials or components
The difficulty in sourcing raw materials and components can make it impossible for the seller to deliver within the contractually agreed terms and consequently delay the delivery of products to its customers/buyers.
When approaching such a situation from a legal perspective, it is advisable first to check whether the contract concluded with the customer includes a clause exempting the seller from liability (or at least limiting its liability) in the event of delay in delivery of the goods.
Alternatively, whether the contract includes a provision (e.g. a "force majeure" clause), which regards delays/difficulties in delivery of components or raw materials by the seller's suppliers as a "force majeure" event, allowing the seller to extend the time for delivery of the goods for as long as this circumstance continues, without incurring liability.
In the absence of such clauses, reference should be made to the law applicable to the contract depending on the specific circumstances. For example, in many cases of international sales between a domestic seller and a foreign buyer, the 1980 Vienna Convention on International Sales (CISG Convention) may be applicable, which contains a specific provision (Art. 79) on the exemption from liability.
On the basis of the specific applicable rules, it will then have to be assessed whether the difficulty in finding the raw materials (or components), which has led to the seller's delay in delivering the goods to its customers, can be considered as an exceptional event, unforeseeable and not attributable to the seller, such as to exempt it from liability for its non-performance.
If it is not possible to exclude or limit the seller's liability in the terms indicated above, it will be important for the seller to carefully assess the consequences of its delay/ non-performance, as well as the possible application of penalties for delay, liquidated damages clauses, compensation for damages, termination of the contract, etc.
Significant price increases for raw materials and/or components
Equally serious is the question of the considerable increase in the prices of raw materials and components, which in some cases have been exorbitant price (e.g. the price of steel has risen by 100%, that of plastics by more than 80%).
In such circumstances, in principle, performance will not be rendered impossible or prevented: it can still be performed, but at a much higher cost to the seller. However, it cannot be a priori excluded that in truly exceptional cases (where price increases are such as to make performance practically impossible) the party could validly invoke force majeure in order to be exempted from liability for non-performance.
Again, it must first be ascertained whether the contract of sale concluded with the customer contains relevant clauses. For example, it may contain a "price revision clause” providing for an automatic increase in the price of the product in the event of increases in the price of raw materials (or components). Or it may allow the seller to renegotiate the terms of the contract (and, in particular, the final price of the product) in view of an increase in the cost of the raw materials necessary for its production.
Alternatively, there may be a hardship clause which the seller may validly invoke in order to obtain renegotiation of the contract terms. This clause dictates that an increase in the cost of raw materials is regarded as an event beyond the seller's control and renders its performance unduly burdensome -. In this respect, it is important to mention the hardship clause drafted by the International Chamber of Commerce (ICC), in its updated version of 2020. If this were the case, the seller could reach compromise solutions with the buyer in order to "share" with its trading partner the supervening excessive onerousness of its performance.
In the absence of the above-mentioned clauses, the appropriate assessments in order to ascertain whether there are any useful means of protection for the seller/manufacturer/exporter, will have to be made on the basis of the law applicable to the contract (e.g. CISG Convention etc.). This includes, the general principles of international law (lex mercatoria) and the Unidroit Principles of International Commercial Contracts, if applicable.
In this respect it should be noted that the question of supervening excessive onerousness is not governed by the CISG. For example, in the case of Italian domestic contracts, reference could be made to Articles 1467 and 1664 of the Civil Code, which deal with supervening excessive onerousness with reference respectively to contracts for continuous, periodic or deferred performance (the former) and to procurement contracts (i.e. “appalti privati”), the latter.
The latter might in particular be relevant in cases where the contract, having as its object the manufacture of a complex product on the basis of technical specifications received from the customer and thus significantly different from the manufacturer's standard product (e.g. the supply of a complex plant), is qualified as a procurement contract rather than a sale, under Italian domestic law.
However, it should also be borne in mind that the remedies offered by such provisions do not always represent a convenient solution for the seller/manufacturer. Indeed, according to Art. 1467 of the Civil Code, the remedy of renegotiation of the contract is not directly available to the disadvantaged party (in this case, the seller) who may only request termination of the contract.
Such termination may be avoided only if the other party (i.e. the buyer/importer) offers to renegotiate the contract terms. On the other hand, Art. 1664 on procurement contracts allows a revision of the price only if the incidence on the sale price is equal to or greater than 10% and the revision may be granted only for that difference which exceeds 10%.
In conclusion, in the light of the foregoing considerations, it will be advisable for the seller/exporter faced with such problems to develop strategies that may lead to a renegotiation of the contractual terms.
About the author
Silvia Bortolotti – Partner at BBM Buffa, Bortolotti & Mathis Silvia Bortolotti, specializes in international commercial contracts (agency, distribution and franchising) and cross border litigation. She is founding member and Secretary General of the International Distribution Institute (IDI); officer of the IBA International Franchise Committee; Italian representative of the EuroFranchise Lawyers (EFL); member of the CLP Commission (ICC) and consultant to many Italian companies’ associations.