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COVID-19: Impact on Supply Chain

23.03.2020 Corporate, Commercial

Mona Patel

Mona Patel Partner

The coronavirus/COVID-19 outbreak has disrupted supply chains globally. Suppliers and providers are finding it harder to deliver their usual services due to (amongst other things) workforce sickness and quarantine, logistics delays and in some cases country wide lockdown.

Businesses that are subject to, or expect, disruption within their supply chain as a consequence of the coronavirus outbreak ought to be considering their contractual arrangements now, so that they can ascertain what rights and obligations they have and whether they are still in a position to fulfil them.

Our services have not yet been impacted but we believe it is only a matter of time.  What can we do to tackle our concerns?

Practical steps you could take include: 

  • Speaking with your counterparty about your concerns and the impact of events on your contractual arrangement with them.
  • Identifying elements likely to impact the supply chain for which you might each agree a proportion of risk and cost sharing.
  • Agreeing to amend certain terms in the contract e.g. grace periods for lead or delivery times during this period (provided you can agree this down the chain with the customer).  It is important that any variation or change is implemented in accordance with the notice provisions (and any other terms e.g. waiver, variation, entire agreement, etc.) in the contract for it to be valid and binding.

It is prudent to keep records of all discussions, decision-making and steps you take to mitigate the impact (you may need this down the line to evidence and/or justify your actions and to show that you have done all you can to mitigate the impact of the events on the performance of your obligations).

What happens if we/our supplier is unable to fulfil an order or perform certain obligations as a consequence of the coronavirus – do we just serve a force majeure notice?

No.  Serving force majeure notices should be considered carefully and where appropriate done in accordance with contractual provisions in order to avoid losing the ability to rely on these provisions.  Whether COVID-19 is covered by force majeure will depend on the precise wording of the clause within your contract.  Even if the force majeure clause does appear to apply in respect of COVID-19 the specific particulars and circumstances must be considered to see if a party is able to rely on such a clause to excuse performance and relieve it of its liabilities (for a time).  Please consider our article ‘A Force of God – the impact of Coronavirus on Force Majeure clauses: An English perspective’ here for a more detailed look at how the concept of Force Majeure may apply in the event that a party is unable to perform its contractual obligations as a result of events outside of its control.  

Are there any other contractual provisions that might assist us where force majeure is not an option and discussions with a counterparty have not been successful? 

There are a number of other provisions within your contract that are likely to assist by providing you with protection and/or particular remedies. It is worth considering whether your contract contains any of the following provisions:

  • ‘Event of default’ - it may be that the inability to fulfil an order (or any other contractual obligation) is deemed an event of default.
  • ‘Material adverse change’ – the events or circumstances may fall within the scope of a material adverse change and trigger this provision.  
  • ‘Exclusivity’ – where an exclusive arrangement is in place, the contract may permit the appointment of alternative or additional suppliers where demand cannot be met or there is a delay which impacts revenue.
  • ‘Hardship’ – economic change, government intervention or a change in law could make it impractical or impossible for a party to fulfil its obligations and the contract may consider this a hardship allowing the parties to relax certain obligations for a period of time, renegotiate or even terminate in some cases.
  • Compliance – obligations relating to compliance with health and safety or other regulations may specify particular remedies of their own.

Such provisions are worth looking at carefully to see if they may, in the circumstances, offer an alternative course of action/process for the parties (to decrease or remove risk) or specific remedies (e.g. agreed liquidated damages, credits, temporary suspension, variation of terms, dual/multi sourcing of supplies, etc.) thereby reducing the likelihood of a dispute.

What else should we be considering at this time?

  • Guarantees/indemnities/performance bonds – if obligations are not performed can these be called upon? 
  • Action or inaction – if you act (or fail to act) based on an inaccurate assessment of your rights, will you be in breach?
  • Related contracts – will a failure to perform one contract have implications for other contracts or elsewhere in the supply chain? 
  • Financial arrangements – does delay/failure in the supply chain and/or the contract have an impact on the financing either party has in place?
  • Cross border issues - are there obligations in other jurisdictions which impact the supply chain (at any tier) which might influence your approach to your contractual arrangement?
  • Insolvency risks – have you experienced any requests for delayed payment terms or credit? How does the contract address these issues?
  • Insurance – are any elements of liability or exposure covered by insurance?
  • Termination – is this option available?  The terms of the contract must permit it.  You should also consider carefully whether such an approach is the least detrimental in the circumstances.
  • Recovery of assets – you may have provided tools or licensed certain assets to your counterparty or they may be holding stock for you. How does the contract address their retrieval in circumstances where termination is a possibility?
  • Contingency plans – consider business continuity and/or contingency plans to ensure you are prepared in the event that contract termination or re-sourcing is required.

The above does not constitute legal advice nor does it consider a complete list of COVID-19 related issues to consider which may affect the supply chain. Should you have any queries, or you would like an expert to take a look at your contracts please do not hesitate to contact the author of this article or your usual contact at Ince.

Article authors:

Mona Patel