Lawyer Predicts Uptick In Supply Chain Arbitration Claims Amid COVID-19

April 14, 2020

As the COVID-19 outbreak causes numerous supply chain disruptions, one lawyer warns that stakeholders throughout the drug supply chain could file a barrage of international arbitration claims, as contractual agreements involving active pharmaceutical ingredient manufacturers, shipping companies and finished drug suppliers are broken due to delays caused by the global spread of the novel coronavirus.

Outside of the global drug supply chain, however, the lawyer says it’s unlikely that U.S. hospitals and health care suppliers will file arbitration claims against drug suppliers because the hospitals are still well supplied.

The drug supply chain involves many global players, which means companies throughout the supply chain have cross-border contracts, most of which contain force majeure and arbitration clauses.

However, COVID-19 has caused numerous supply chain disruptions due to manufacturing shutdowns, shipping delays and export restrictions.

That means API makers, international shippers and drug companies will be unable to meet their contractual obligations, and companies will have to claim force majeure to absolve their inability to uphold agreements, J.P. Duffy, an international arbitration practitioner for Reed Smith, told Inside Health Policy.

Force majeure occurs when one party is unable to fulfill its contractual obligations due to forces outside of its control. If a party claims an event as force majeure, it is relieved from its contractual duties for the duration of the event.

However, when one party claims force majeure month after month, parties on the other end of the contract can become frustrated and invoke an international arbitration clause, which must be resolved by a neutral arbitrator.

According to Duffy, many companies are looking at force majeure agreements to resolve contract conflicts, and that’s setting the stage for post-COVID-19 international arbitration claims.

“Right now, I think everyone is still reeling from the present situation, so most companies are not bringing formal arbitrations [yet] ... because events are moving so quickly and performance challenges are so pervasive,” Duffy said.

However, as the clock keeps ticking, counterparties will invoke arbitration claims as the financial pressure continues to mount, Duffy adds.

“Just as you saw during the financial crisis, as you start to get towards margins of what is reasonable, people will start disagreeing about whether parties can declare force majeure or how long such a declaration might excuse performance, and then you will start seeing claims,” Duffy told IHP.

For example, though restrictions are beginning to ease in major manufacturing countries like China, the country is reporting that it’s unable to ship finished drugs and drug ingredients to the United States due to delays with ocean shipping service providers.

Because manufacturers and shipping companies cannot perform as they did before the COVID-19 outbreak, contracts can’t be upheld and drug makers awaiting pharmaceutical ingredients will be pushed to file claims due to mounting financial pressure.

“What you will see [are claims] up and down the supply chain, from raw material manufacturers to final drug manufacturers, and everywhere in between,” Duffy said.

However, while there will be arbitrations throughout the drug supply chain, Duffy believes that the claims themselves will not affect supply flow, apart from parties that may not wish to continue doing business together because of those claims. -- Kelly Lienhard (