COVID-19 has caused huge disruptions to supply chains. In the first of two articles on managing your business operations, we outline some key tips for understanding your exposure, both upstream and downstream, in your supply chain and possible steps to keep your operations moving as much as possible.
Understanding the situation and its implications
1. Assess the immediate impact
- Identify key and affected manufacturers, suppliers and customers. Identify any contracts which, if unperformed due to COVID-19, will have consequences for other contracts.
- Set up an internal dedicated response team who review the potential impact of COVID-19 and provide regular internal updates.
- Get evidence and details from any suppliers who say they are unable to perform under your contracts. Ask for details on exactly how they are affected. Take care when communicating to affected suppliers so that you reserve your legal rights. Obtain legal advice if you are unsure about how to respond.
- Document any attempts you make to mitigate your exposure or losses, including any unsuccessful attempts, for contracts where your counterparty is unable to perform and where you are unable to perform. Keep detailed records of what has happened and discussions with counterparties.
- Keep aware of Government updates about new protections or funding that you may be able to benefit from.
2. Review your contracts
- Do not react quickly to terminate agreements or claim a "force majeure event". Your contractual rights will be determined by the specific wording of the agreements and the facts.
- Review affected and/or key contracts and identify any:
- "time is of the essence" obligations;
- "force majeure" clauses (or other clauses addressing events beyond the parties' reasonable control) – see 3. below;
- whether any of the obligations which either party might be unable to perform as a result of the COVID-19 outbreak are "material", and might therefore trigger a right to terminate for material breach;
- termination rights for a party if it reasonably believes that the other will not perform;
- liquidated damages clauses (are you entitled to liquidated damages or oblige to provide them?);
- obligations on a party to implement a business continuity disaster recovery plan; and
- specific notification obligations in the event of possible delays or non-performance?
- Consider if it is possible to line up a replacement supplier, if your supplier cannot perform under an agreement. Are your supplier agreements exclusive? How quickly can you send across product specifications? Do you need to perform any necessary due diligence on the replacement supplier? Can a member of your team visit the replacement supplier to help bring the supplier up to speed? Document the costs of any replacement suppliers in case you are able to claim these as losses from your original supplier.
- If your counterparty has the benefit of any termination rights, start communicating with them early as possible (rather than wait until you are in breach). This puts the counterparty on notice of the issue and it can begin to take steps to mitigate its loss.
- Review the liability provisions in your agreements (both with your suppliers and customers). Is liability capped? Is there an exclusion for loss of business, profits or contracts? Can you rely on the exclusion of certain liabilities? What losses are you unable to claim from your counterparty?
3. Force majeure clauses
- Force majeure clauses typically operate by offering one or both parties, on the occurrence of certain predefined force majeure events (i.e. events outside the parties' control), (i) relief from delayed or non-performance of contractual obligations and/or (ii) the right to cancel the contract.
- Please see our previous guidance on force majeure clauses here and here.
Take mitigating steps to manage your exposure
1. Try to keep business moving as much as possible
- Focus on online sales, rather than sales through physical stores. This may involve shifting resources and funds into improving page loading times, removing unnecessary steps for online purchases to improve conversion rates or offering existing customers a discount. Manage customer expectations for when they might receive online purchases.
- Identify where any goods in transit are currently held, if they may be held up at customs due to quarantines and who is responsible for insuring goods whilst they are in transit. Request confirmation of any insurance coverage applicable to such goods so that you can confirm the position.
- Try and identify spare carrier capacity to keep your raw materials, supplies and products moving. If engaging a new logistics provider, bear in mind these key risks:
- identify who bears the risk for products in transit and during on-loading/off-loading;
- do any of your raw materials, supplies or products contain alcohol, valuable items, or chemicals? If so, additional requirements may apply on how these should be transported and some carriers may not be willing to handle them;
- how quickly will the carrier promise to deliver your items? Is there monetary compensation if delivery times are missed?
- how will the carrier drop off your products? Do you need someone to sign for items or can they simply be dropped off at the premises?
- what is the carrier's process for investigating and remedying missing products or products damaged during transit? Does this align with your customer service policy?
- Remember to manage your workforce's and client's health and safety. Read our previous guidance on this here.
2. Understand your rights around personal data
- The Information Commissioner has recognised that businesses may need to share information, particularly about employees, or adapt the way they work – for instance through remote working or innovative solutions – and has clarified that data protection doesn't prevent these measures, provided businesses are aware of the boundaries, and act in a proportionate manner.
- The Commissioner has also said that her office knows that resources may be diverted away from data protection compliance work, and will refrain for the time being from taking any regulatory action against business that fail to meet the usual required standards.
3. Managing orders placed with suppliers
- Where you have already placed orders with suppliers, try to identify key pieces, samples or materials which should be prioritised. It may be better to provide smaller collections than nothing at all.
- Consider likely delivery dates of seasonal items and whether it is possible to reduce orders for these, if their actual delivery will make them much less relevant. Regularly review any temporarily reduced services with your suppliers.
Practical guidance for COVID-19
Read the latest COVID-19 related updates on our hub.