Reshoring - the risks - the bite in returning to Blighty

Although there are often good commercial benefits in reshoring manufacturing, there are also some potential risks and hidden costs to be considered.

Existing arrangements with the offshore supplier must be terminated and new arrangements with the new supplier will need to be entered into. Ideally there will be a seamless transition and minimum disruption to the supply chain and manufacturing output. Behind this simple idea there are legal complexities and potential disputes.

The existing offshore supplier may object to the arrangements being terminated and that may give rise to a dispute, particularly if the commercial terms negotiated at the outset have factored in a long term relationship which will not now come to fruition. The offshore supplier may threaten to bring a claim; may refuse to cooperate and deliberately disrupt supplies; may refuse to hand over any data, machinery or patterns and may approach competitors with offers to supply.

Faced with this dispute, the first question we ask is for sight of the paperwork which explains the arrangement with the offshore supplier. We look for the clause which confirms what the parties agreed regarding the law which would apply to their arrangement. We were instructed by a client who found to his surprise that the terms and conditions he had downloaded from the internet and used in the agreement with his supplier referred to the arrangement being governed by Danish law.

The clause regarding the applicable law may not be conclusive as some jurisdictions do not give the parties the freedom to agree what law applies. There may be a dispute regarding this preliminary point and in itself it is a very complex area of law. In the absence of an agreement or in the event of a dispute, then the English Court would consider various factors such as the location of the parties and where the arrangement is being carried out or goods supplied.

In addition to considering what law applies, we would also need to consider what the parties agreed regarding the forum for dispute resolution. Ideally, we would want to find an agreement that the Courts of England and Wales have jurisdiction to deal with a dispute. The English Courts can take expert advice from a specialist in the law of the applicable jurisdiction. For example, in a case we dealt with in the High Court in London, the applicable law was Irish law and a lawyer from Dublin was called to give evidence and explain to the Court what the position was under that jurisdiction.

If there is a long supply chain the position may be complicated further if there are master or global agreements and also local agreements with the potential for different laws and jurisdictions applying in each.

The appliable law will not only determine what the parties can do to terminate the supplier relationship but also the remedies available if a party is unhappy with the outcome and whether they can enforce any such remedy. It may be possible to bring a claim in the English Courts but the judgment will not be of any benefit if it is not possible to enforce it in the country where the rogue offshore supplier is located. If the offshore supplier decides to bring a claim then it may be dealt with in the offshore supplier's jurisdiction and under the law applying there and that will give them a distinct home advantage.

Dealing with issues regarding the applicable law and jurisdiction will increase substantially the costs incurred in resolving any dispute with the offshore supplier. In addition, it will be an unwelcome diversion when trying to re-shore the supply chain.

It must also be recommended that in engaging new suppliers robust arrangements are entered into with detailed written terms and conditions to attempt to provide you with some protection should things not work out as planned. In particular, read the small print - check you are not subject to Danish Law.