If you are about to go on vacation, or have just returned, you will be all too aware that car hire prices have rocketed across the world in the past year. The soaring cost is an example of the butterfly effects that can ripple through supply chains. With car rentals, in large part, this traces back to a decision taken by microchip manufacturers at the outset of the pandemic. Faced with an army of now immobile home-workers, many diverted production from cars to home computing. 

An average car comprises approximately 30,000 different parts, sourced from across the globe – the potential for disruption in one part of the supply chain to spread across the industry is clear. What can be less obvious to businesses trading upstream and downstream across different regions is the risk posed by contracting on mismatching local laws. Seemingly similar terms can be interpreted very differently in different jurisdictions, especially when additional obligations or restrictions are superimposed onto the arrangement by local laws.

It's not possible

A classic of this genre is the concept of force majeure, which came to the fore when COVID-19 hit and has been the subject of resurgent interest because of the Russian invasion of Ukraine and the sanctions regimes imposed as a result. Many civil law jurisdictions in Europe have specific definitions of what constitutes force majeure, set out in their civil codes. 

In others, such as Germany, there is no statutory concept of force majeure, but parties may be relieved of their obligations on the basis of impossibility, unreasonableness, frustration or default. This can include where the contract becomes impossible for either party to perform (known as objective impossibility) or impossible for just one party (subjective impossibility).

In English law, the circumstances in which the law will step in to relieve parties of their contractual obligations are even more limited. If the parties want to excuse performance where the contract becomes impossible (for example, due to war), they must provide for this in the contract, specifying what will count as a force majeure event, as well as what should happen in the event of force majeure. Is performance suspended only temporarily? Are the parties able to terminate the contract? As is the case under some statutory regimes, might they even be able to cancel the contract with retroactive effect, requiring the parties to refund payment for goods or services that have not been delivered?

The position is therefore not, as it is sometimes characterised, a simple division between a statutory regime in civil law jurisdictions and a contractual one in the common law world. Germany and Poland are examples of civil law jurisdictions that do not have a statutory concept of force majeure. It is also common for contracting parties in other civil law systems to include a contractual term that goes beyond that set out in legislation, to specify precisely what the parties consider should constitute force majeure and the commercial consequences if the clause is triggered.

It's not economic

More common than force majeure is a scenario where fulfilling contractual obligations will still be technically possible, but a hike in the cost of energy, labour and materials means that it is no longer economic, at least not on previously agreed rates. In some jurisdictions, such as Germany, the law will step in to offer relief, while in others the supplier will remain bound by the original terms.

The German approach allows a party to seek reasonable adjustments if the contract has become uneconomic or significantly different in scope. If those adjustments are not possible, it is possible to terminate the contract. Similar rights exist in Poland, where the courts can step in to determine how the contractual obligations are to be fulfilled, the amount of any financial entitlement or whether the agreement can be terminated.

This option does not exist in English law, where the driving ethos is that parties should be held to their original bargain – no more, no less.

It's not fair

The corollary of the English approach is that the parties are largely unconstrained beyond the specific terms of the contract. The concept of good faith is evolving but limited. Where parties are given discretion under the contract, they must not act in a way that is irrational, arbitrary or capricious. Beyond that, they are able to exercise rights to impose charges or even terminate the contract without justification or warning.

Polish law similarly affords the parties a large degree of latitude. Parties are expected to act with due care (the level of which is higher for professionals) but do not need to conform to any general duty of good faith. This differs from jurisdictions such as Germany, where parties owe each other good faith duties in their commercial dealings. This extends from the start of the relationship, including pre-contractual negotiations, to the end, where parties are usually expected to try to reach resolution before directly exercising a contractual termination power.

What this means for businesses

If your business has suppliers and customers in different jurisdictions, the risk of contracting under the local laws of your counterparties is that your supplier may be entitled to relief in response to an unforeseen event such as war, a pandemic or just spiralling costs, while you might remain bound by the now impossible or uneconomic terms agreed with your customer. Or the reverse may be true – your customer may be entitled to terminate the contract, despite the fact that you remain committed to minimum order quantities from your supplier.

It will not always be possible to impose your standard terms, or even choice of governing law, on all of your contracts, but taking a few practical steps can help you to understand and manage the risk to your business:

• Do not switch at the last minute: in the heat of commercial negotiations, there may be pressure at the last moment to concede terms that are seen as "boiler plate". If the contract has been drafted or reviewed from the understanding of one governing law, changing that can alter the interpretation and operation of other terms – with potentially significant ramifications.
• Practice good contract hygiene: check that commercial teams are sending all material contracts to the legal team for review, that final agreed terms are recorded, and that authority levels are clear and being complied with.
• Educate the business: helping the procurement, sales and management teams understand the risks can improve the proportion of contracts that are entered into on the basis of your preferred governing law and jurisdiction. 
• Keep track of your risk profile: record governing law and jurisdiction for each contract within a central contract management system. Review regularly and test out different scenarios (failure of key suppliers, rising costs) to identify the areas of greatest risk.
• Align terms where possible: concentrate on key contracts, understand how concepts such as force majeure, termination and any renegotiation rights apply and aim to mirror those effects in other contracts where terms are negotiable.