Navigating risk when global conflict impacts local business

What was once viewed as a contingency risk is fast becoming a live operational risk for businesses which may manifest as contractual management issues. With fuel supply pressures remaining unpredictable, organisations should be turning their minds to how disruption may affect contractual performance, trigger risk allocation clauses, and increase the likelihood of disputes.

Businesses are already facing impacts and uncertainty as a result of fuel shortages and fuel supply disruption. The education sector and its services providers are impacted by increased fuel prices and there are reports of school camps being cancelled as prices spiral. Cost pressure and delays caused by fuel issues or transport constraints have the potential to impact the construction sector. We are seeing an uptick in enquiries where delivery of contractual obligations is delayed or service levels are slipping. Despite temporary fuel support relief measures introduced by the ATO and the federal government, and business lender support, financial stress and operational challenges are impacting small to medium enterprise. 

It is important for all businesses to consider how current and ongoing volatility in fuel supply may impact on their operations and to be prepared to respond accordingly. In particular – delay in performance of contracts, requests for a higher amount to be paid or a need to preserve your rights if a contract may be headed for dispute.

What does the contract say?

The starting point always is to consider a contract and its terms.

Some contracts allow specific flexibility based on fuel costs. We have seen examples of school agreements with bus companies that specifically enables a fuel levy to be imposed by agreement, where the cost of diesel increased by a specific amount.  Suppliers may seek to add a so called “emergency fuel levy” but unless specifically provided for by the contract, it may not be payable by the counterparty.

Other contracts do not allow any flexibility on price – fixed price building contacts and services agreements. Where there are delays in performance of contracts purportedly as a result of supply chain issues (caused by fuel scarcity for instance), it is not always possible – let alone desirable – for counterparties to a contract to vary its terms.

Force majeure contractual clauses are often but not always contained in commercial agreements. If they are, they may not extend to suspending or delaying contractual obligations when events beyond the parties control prevent performance.  The current fuel crisis may not constitute a force majeure – it may fall into the category of “frustration” of contract.

Contract disputes

We expect to continue to see an increase in contractual disputes in the coming months – whether because the contractual arrangements themselves are in breach or where counterparties seek to end a contract due to business uncertainty generally or a reduction in revenue. We see contractual risks arise in some of the following situations:

• Construction: requests for relief (time and cost) in anticipation of the conflict in the Middle East affecting delivery of materials or equipment where freight or fabrication is impacted. Even if the contract offers good protection, this will not stop contractors from approaching counterparties to ask for more money.
• Schools: requests for higher than agreed payments or unilateral imposition of “fuel surcharges” and delay or breach in delivery of contracted services
• SMEs: suppliers of goods or services being threatened with or receiving notices of default or termination as a result of the contract becoming commercially unviable due to increased logistics costs, or due to operational contraction in the counterparty’s business
• Services providers in aged care and disability care sectors: difficulty meeting staffing ratios or service provision under agreements, where staff travel costs are impacted

Insolvency risk

Perhaps less obvious are insolvency related risks, particularly for SMEs operating on tight margins or with limited cash reserves. Cash flow pressure may follow where fuel price spikes or potential shortages in future delay projects or increase operating costs – particularly if contracts remain bound to fixed prices or strict completion timeframes. Where contractual arrangements are disrupted, payments withheld or termination and/or claims for damages can compound financial strain. 

Directors must remain alert to the risks arising from unprofitable or disrupted contracts and continue to monitor cash flow, contractual exposure to avoid trading while insolvent if fuel related disruption materially impacts operations. Where solvency concerns arise, Boards should seek immediate advice and consider the safe harbour provisions. The recent Federal Court decision in the Star Entertainment case has significant implications for directors and officers, including requiring proactive Board oversight in active risk management and governance. 

Practical considerations

Whether you operate in the education sector, construction sector, you are a not for profit or a small business, any correspondence relating to contractual rights or alleging breach of contract or frustration need to be taken seriously. Even where performance of contracts remains possible, delay or cost pressure can expose businesses to unexpected claims or contractual disputes.

For organisations where fuel disruption causes a supply chain risk, in addition to reviewing your operational risks you will benefit from also reviewing your legal risks and key contractual arrangements.

How we can help

The Disputes Team at Moores can support in reviewing legal risks and key contractual arrangements to ensure your organisation understands contractual risks. We can advise on contractual rights and obligations if any issues arise. We also assist where contractual disputes can’t be resolved – from notice of default to conduct of litigation.

Contact us

Please contact us for more detailed and tailored help.

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^{Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.}