Coronavirus and Supply Chain Management

11 Mar 2020

The global economic effect of the Coronavirus outbreak remains a great unknown concern, both short term and long term. The concern is not necessarily misplaced. The scale and competitiveness of Chinese manufacturing, exports and labour in the global market means that a significant proportion of businesses will be affected by disruption caused by the virus. Some reports suggest that the Chinese manufacturing index has already dropped to pre-recession levels.

Equally, worst case predictions suggest that up to one-fifth of workers could be absent from the UK workplace, which will affect productivity even for businesses without international links.

It is easy to focus on headline grabbing statistics, but it is perhaps more productive to instead consider what practical measures can be taken to protect interests and manage risk in your supply chain.

All in the contract

The resounding advice is to check the specific terms, and particularly the “small print”, of relevant contracts. It rarely makes for interesting reading, but it is the Holy Grail for avoiding issues and protecting positions in any litigation. This is particularly important in areas such as construction where a contractor may be subject to the ultimate contract terms of the employer, and it is an easy area to get caught out. Some of the most likely relevant clauses are considered below.

Termination

If the supply chain is disrupted, the most practical option would be to seek alternative suppliers who are less affected by the outbreak. Contract termination is, however, one of the most high risk areas giving rise to disputes. Businesses should carefully consider any termination or exclusivity provisions before terminating an agreement and/or appointing an alternative supplier.

Force Majeure

Force majeure, meaning unforeseeable event, may be enough to give relief to a party left unable to perform their contractual obligations as a result of the Coronavirus outbreak.

The chance of a force majeure clause specifically referring to the Coronavirus is unlikely, unless recently entered into. Clauses may instead refer to epidemics or government intervention and parties would need to consider the applicability in their particular circumstances. A certificate of force majeure from a government will add weight (as reportedly provided to various businesses in China already), but it is a matter ultimately determined by the contract itself.

Frustration

Alternatively, the contract may be frustrated if it becomes impossible to perform – for example a shipment is due for delivery to a location which becomes quarantined. Inconvenience or additional cost in performing may not be enough, and frustration is a high and complex hurdle to get over.

Pricing

Does the contract contain any provisions which link the price of goods / services to any foreign exchange rate or raw materials index, which may become volatile as a result of uncertainty caused by the virus. What opportunities are there to re-negotiate the price?

Variation

Does the contract contain any ability to vary the terms of the contract, in particular as to the time for performance of obligations and/or the price? Even if there are no such express provisions, is the relationship of the parties good enough to enable the parties to have an open discussion about varying the terms of the contract to reflect problems caused by the virus?

Dispute escalation and ADR

Does the contract contain any express mechanism for escalating disputes and/or is there any mechanism for alternative dispute resolution that needs to be adhered to.

Jurisdiction

Contracts may have jurisdiction clauses which specify the applicable law and forum. If a contract states that claims must to be pursued in a country which is currently affected by quarantine and shut down, the process is unlikely to be a quick one. Parties should consider the enforceability of these clauses.

Confidential and without prejudice

In some cases it will be appropriate or necessary to take action to recover losses. Other situations may be more nuanced and potential claims may be waived in the spirit of maintaining established goodwill. Any settlement agreement should be recorded as strictly private and confidential to avoid uncomfortable discussions with others who may expect similar treatment. Offers or discussions to settle should, as always, be marked as without prejudice save as to costs.

Businesses are advised to be conscious of this risk and potential entanglement in future disputes when deciding on the short term action they take in response to any disruption.

For more advice and assistance in connection with supply chain management, please do not hesitate to contact Jon Stickland or Karl Cameron on 0800 2800 421.

Author

Jon Stickland

Partner