When Beijing hit the brakes on rare earth exports this spring, supply chains began to screech. For many industrial companies the sound is familiar: just a few years ago the semiconductor shortage had wreaked havoc on production schedules.

Rare earths are essential for various industries, including technology, automotive and defence. China controls about 60 to 70% of global rare earth mining and well over 90% of processing capacity.

In April 2025, China imposed a de facto export freeze on seven rare earth elements and related magnets, pending the rollout of a new export-control regime – reportedly aimed at the US defence industry. That regime is now beginning to take shape.

All exporters must obtain an export licence which, according to industry reports, involves a comprehensive application process. This may include end-use declarations and disclosure of sensitive information about customers, volumes and on IP-related production details (such as designs or manufacturing processes for electric motors). Applications are reportedly piling up, with only a small fraction approved to date.  

The impact on global supply chains is becoming increasingly visible. Inventories are running low and prices have spiked – for example, outside China, dysprosium and terbium have traded at double or even triple the domestic price. As a result, some tier-1 automotive suppliers and OEMs have reportedly begun shutting down production lines.

It remains unclear whether China will maintain its current export controls or amend them – for better or worse. Recent negotiations in London (10 June 2025) produced a draft US-China framework that could ease the restrictions, though ratification remains uncertain. Earlier, Beijing had floated the idea of a ‘green channel’ for EU-bound shipments, yet details are likewise unclear.

This briefing outlines the key legal implications of disrupted supply chains, including contractual risks, available legal instruments and potential challenges. It also considers how to select the most  appropriate legal framework when contract performance is threatened.

Legal implications for supply contracts 

The legal consequences of disrupted supply contracts depend heavily on the governing legal framework. In many cases, suppliers along the chain may bear full performance and liability risks towards their buyers. To continue performance, they may have to source substitutes – if available – at significantly higher prices from alternative suppliers. If they fail to deliver on time, buyers may be entitled to claim damages and/or terminate the supply agreement.

Mitigating contractual risks

Legal instruments for supply chain disruptions

The allocation of contractual risk arising from rare earth export restrictions depends on the applicable legal framework – namely, the terms of the supply agreement and relevant statutory law.

Supply agreements may offer specific mechanisms to manage distressed supply chains. These often include clauses that define the conditions for claiming damages or grounds for termination, along with any time limits or procedural requirements.

In addition, supply agreements may include clauses designed to help parties adapt to market disruptions, although these are often open to interpretation and may carry legal uncertainty:

• Force-majeure clauses may (temporarily) release a supplier from performance and liability due to an unforeseeable event beyond their However, the clause must explicitly cover export restrictions – a point that may be disputed by the buyer.
• Hardship or adaptation clauses may oblige both parties to renegotiate the contract if its commercial basis has fundamentally changed.
• Price-adjustment clauses vary widely. Some are tied to specific price indices, while others simply require the parties to renegotiate in response to market shifts.
• Flexibility clauses may allow buyers to source a portion of their requirements from third parties if the original supplier fails to deliver – without breaching exclusivity obligations.

The above list is not exhaustive. Companies should conduct a thorough review of their supply agreements to identify any contractual grounds for addressing disruptions with their counterparties.  

Where specific contractual clauses are absent – or in addition to them – parties may rely on applicable statutory law. This includes legal remedies for a breach of contract due to untimely or non-performance.

In addition, parties may invoke statutory doctrines such as:

• Impossibility of performance (eg, under s.275 German Civil Code, art.79 CISG or similar common-law doctrines) may release a party from its obligations if performance becomes objectively impossible. However, courts may reject this argument if alternative supply sources exist, even at higher cost.
• Frustration of purpose (eg, under s.313 German Civil Code: Wegfall der Geschäftsgrundlage) may apply where an extraordinary and unforeseeable event fundamentally alters the basis of the contract. However, the threshold is high – mere price increases typically do not suffice.

Identifying legal challenges

China’s current export control regime on rare earths presents a range of legal challenges for parties attempting to meet contractual obligations or assert their rights under supply agreements. Even where supply continues, complies must navigate complex legal terrain, including:

• Non-disclosure obligations: Suppliers may need to disclose IP-sensitive information – such as the intended use of rare earth volumes – to Chinese authorities as part of the export licence process. This could breach contractual non-disclosure obligations, particularly where buyers have shared proprietary design specifications or third-party IP-protected technologies.
• Obligations to cooperate: Suppliers may request buyers to provide information necessary to complete export licence applications If buyers refuse or delay, they may later be precluded from claiming damages for non-delivery, especially if the supplier’s inability to obtain a licence stems from the buyer’s lack of cooperation. Buyers may face a dilemma if disclosing such information would breach NDAs or compromise business secrets.
• Allocation decisions: where suppliers can only secure limited volumes of rare earths, they may need to decide how to allocate them among their buyers. These decisions could raise legal questions, including potential exposure under competition law.

When parties seek to invoke rights under supply contracts – such as force majeure or hardship clauses – they may encounter several legal hurdles:

• Contract interpretation: Supply contracts are often subject to interpretation, especially where clauses are vague or broadly worded. Disputes may arise over whether a force-majeure clause covers export restrictions, whether a supplier is obliged to procure alternative supplies at any cost, or what the legal consequences are if renegotiations over price or contract terms fail.
• Foreseeability: Given China’s prior export restrictions on other commodities like gallium and germanium in 2023, buyers may challenge claims that current rare earth restrictions were unforeseeable – particularly in contracts concluded more recently.
• Attribution of responsibility: Both supplier and buyer may argue that the other party is at fault for failing to stockpile or secure alternative sources, potentially limiting or excluding liability.
• Impossibility of performance: While rare earths are now harder to obtain, they are not entirely unavailable. As such, courts may set a high bar for proving impossibility, requiring evidence that procurement is objectively unfeasible – not merely more expensive.
• Obligations to notify: The execution of contractual rights may be contingent on timely notification. For example, a party may be required to promptly inform its counterparty of impending delivery failures to preserve its legal position.

As a result, companies should map the legal landscape of each contractual relationship with their suppliers or buyers – both to remain compliant with the contractual regime and to preserve claims or defences.

Choosing an appropriate framework for legal action

The appropriate forum for addressing the impact of China’s rare earth export restrictions on depends on the specific circumstances.

Supply agreements may contain a specific dispute resolution clause prescribing a particular forum or sequence of steps – so called multi-tiered dispute resolution clauses. 

Where no such mechanisms are contractually agreed, parties may consider a range of options, either individually or in a staged escalation. The choice of forum should reflect the urgency of the situation, the commercial relationship, and the legal remedies sought:

• Negotiation: Often the most efficient and relationship-preserving option, direct negotiation can lead to swift, commercially viable solutions.
• Mediation: If negotiations stall, mediation offers a confidential forum to reach a balanced settlement. It is particularly useful for preserving long-term supply relationships, but requires genuine willingness from both parties to engage.

If collaboration fails or time is critical, parties may need to initiate adverse proceedings to avoid serious economic disadvantages:

• Interim relief: In urgent cases, parties may seek interim measures to secure deliveries and prevent serious economic harm. However, courts or tribunals typically impose a high threshold for such relief – especially where the supplier may still be able to obtain rare earths and an export licence.
• Emergency arbitration: If the contract includes an arbitration clause, some arbitral rules (eg, ICC Rules) allow for emergency arbitrators to grant interim relief quickly – within 15 days under Article 6(4) of Appendix V of the ICC Rules.
• Litigation or arbitration: Where delivery failures cause significant losses, parties may pursue damages through litigation or arbitration. While these proceedings can result in enforceable decisions, they are often time-consuming and outcomes may be uncertain. Some arbitral frameworks offer expedited procedures to accelerate resolution.

These options should be examined on a case-by-case basis to assess their chances and risks under specific contractual and commercial circumstances. Early legal review is essential – waiting until inventories are depleted or deliveries halted may severely limit available remedied and increase the risk of contentious disputes.

Key takeaways: Preserving contractual and statutory rights  

Contractual agreements and statutory law offer important tools for managing the legal risks associated with China’s export restrictions on rare earths.

As the regulatory landscape continues to evolve, companies should prepare for ongoing – and potentially tighter – restrictions by taking proactive legal steps:

• Review supply contracts and applicable law to identify relevant obligations and legal instruments across both upstream and downstream relationships.
• Comply with mandatory requirements, such as notification obligations, to preserve the right to claim remedies or enforce defences.
• Act early: Explore potential legal avenues before commercial pressure limits the range of feasible options.

How can we help?

Our team has deep expertise in advising clients on the legal implications of supply chain disruptions including those triggered by export controls and geopolitical developments. We regularly conduct comprehensive contract reviews across multiple jurisdictions and have a strong track record representing clients in mediations, complex litigation, and international arbitration..

Drawing on this experience, we support companies in navigating the legal and commercial risks arising from China’s evolving export-control regime on rare earths. We deliver forward-looking strategies that limit legal exposure while preserving the full spectrum of contractual remedies.