Welcome to #FreshStartMonday!

In October 2023, Guatemala was paralyzed by a series of protests and blockades against the government that lasted 21 days. The most affected economic sectors were the food industry, hospital supplies, industrial chemicals, among others. As time went by, the shortages and non-compliance with contracts resulted in an increase in the prices of the basic food basket.

While the crisis in Guatemala subsided, a similar situation broke out in Panama. The approval of a mining contract generated massive protests that immobilized the country and slowed regional trade. According to the Panamanian logistics sector, the 23 days of demonstrations caused a billion dollars in losses for international transport companies.

There are two big lessons to be learned from these experiences. First, political instability in the region may continue to impact the movement of goods and people. Despite the end of the pandemic, supply chains remain vulnerable. Second, measures need to be taken to mitigate the risks arising from such events.

One of the ways in which these risks can be mitigated is through a contract that goes beyond the commercial transaction and the search for lower prices. It requires an agreement that can establish the basis of an alliance with suppliers, where both parties are clear about their obligations and responsibilities.

Below, we share some clauses that should be considered:

1. Use of Incoterms:

Incoterms are standardized terms that define the responsibilities of buyers and sellers in international trade transactions. They can also be used in supply contracts, especially when they involve the cross-border movement of goods. Incoterms define the delivery, risk transfer and cost responsibilities between the supplier (supplier) and the customer (recipient).

For example, an Incoterm such as FOB (Free On Board) would state that the supplier is responsible for the goods until they are loaded onto the means of transport, at which point risk and responsibility are transferred to the customer, or DDP (Delivered Duty Paid) allows the supplier to assume all costs and risks until delivery of the goods at the customer's designated place, including customs clearance. Whereas under EXW (Ex Works), the customer would assume responsibility from the point of collection at the supplier's premises.

2. Risk SharingAgreement:

Potential risks in the supply chain can be detrimental to both parties. They may affect the delivery of essential raw materials, or they may affect the sale of the products which could trigger a series of complications in the agreed payment.

For these reasons, it is advisable for the parties to include a risk-sharing clause to provide an equitable framework for the distribution of risks between the parties, for example by agreeing that the contract can be modified if due to extraordinary events that are impossible to foresee and avoid, the performance of the contract becomes excessively burdensome for the parties.

By doing so, a relationship of cooperation and mutual trust is promoted, since both parties recognize and assume a proportional percentage of the risks inherent in the agreement. For example, in situations of logistical disruptions, you could establish protocols for contingency management, such as finding alternative routes or back-up suppliers.

3. Force Majeure:

The pandemic demonstrated that the inclusion of a force majeure clause in a supply contract is indispensable, particularly in a context where unforeseen events can significantly alter the conditions of contractual performance. According to the Guatemalan Civil Code, parties are obliged to comply with their contractual commitments and non-compliance entails liabilities, including the payment of damages. However, force majeure constitutes an exception to this principle.

Force majeure is characterized as an unforeseeable, unavoidable, external event that breaks the causal nexus, current and supervening. Guatemalan law[1] provides that if a force majeure event occurs, the debtor may be exempted from liability for nonperformance, provided it is not already in default. It is crucial that the affected party timely notifies the obligee of the event and demonstrates how it prevents the performance of its obligations.

It is prudent to include a specific clause defining what constitutes a force majeure event in the context of the contract; establishing procedures for notification and verification of such events; specifying the effects on contractual obligations, including suspension or termination of the contract; determining damage mitigation mechanisms and possible contractual adjustments.

4. Performance Clause and Penalties:

Explicitly detailing the consequences associated with non-compliance with the terms agreed upon in the contract provides a clear mechanism for handling situations of non-compliance. Some common penalties in supply contracts include: the charging of a specific amount for each day of delay in the delivery of goods, up to an agreed maximum amount; the right to cancel outstanding orders without incurring liability: or the establishment of compensation, discounts, or replacement obligations if the goods delivered do not meet the agreed quality specifications.

In addition, to mitigate any losses that may arise, the parties may consider taking out insurance policies to cover losses due to transport damage, interruptions, civil liability, and other related risks.