Delicacy of supply chains laid bare by German factory fire

A raft of supply chain risks were recently uncovered in the automotive industry after a single factory fire has threatened to curb world car production says Giles Searby, Partner at Hill Dickinson LLP.

Few headlines were made by the devastating fire at a small chemical plant in Marl, Germany at the end of March in which two workers tragically died.

The plant was a leading producer of PA-12, a resin widely approved for use in the manufacture of, among other things, brake pipes, which are then supplied to the world’s automotive manufacturers.

The danger that car production lines may be halted as a result looms large over the industry, with all the huge financial losses that would flow from that. What if you were an affected brake pipe supplier who couldn’t supply the manufacturer?

The legal doctrine of force majeure excuses liability, if an unforeseen event, beyond the control of a party, prevents it from performing its obligations under a contract. Typically, force majeure clauses cover natural disasters, war, or the failure of third parties, such as suppliers, to perform their obligations to the contracting party.

Unlike most continental jurisdictions, English law does not allow the doctrine of force majeure to be implied.  Unless dealt with in the contract’s terms, the affected party will remain liable to its customer even if the cause, like the PA 12 shortage, was something entirely beyond their control.  This could be catastrophic.

Careful consideration must also be given to exactly what events will or will not justify the use of a clause.  For example the flight ban caused by the volcanic ash cloud raised the question – was that ban the result of a natural disaster or of governmental action – the volcano put the dust in the sky, but  the CAA stopped planes flying through it.

Events such as these underline the fact that all manufacturers involved in delicate supply chains need to assume worse case scenarios and ensure that their contracts insulate them from all risks outside of their control.