Out-Law Analysis | 13 Mar 2020 | 3:59 pm | 7 min. read
Many products and services in the UK depend on fast, efficient supply chains, which are highly integrated and often operate cross-border. Any supply chain is only as good as its weakest link. Companies should act promptly to assess the risk that the coronavirus, officially Covid-19, poses to their supply chains and their ability to meet obligations under customer contracts.
The coronavirus is particularly likely to impact on:
Businesses risk not being able to meet contractual commitments to their customers, whether that is because the business itself is affected by the coronavirus or its supply chain is.
A clear understanding of contractual terms will enable businesses to plan and prioritise their response.
All businesses should review:
The exact position will vary depending on the contract and the relevant governing law. However, there are some practical steps that businesses can take in order to manage and mitigate risk during the outbreak.
Quickly identify the position under contracts with customers and suppliers. Contractual terms with logistics providers should also be considered, as they will be critical to keeping goods moving. A clear understanding of contractual terms will enable businesses to plan and prioritise their response. For example, which customer contracts have severe penalties for late delivery? What are the governing law provisions? What do relief and force majeure provisions provide? Which contracts can be terminated on short notice?
The legal analysis should then be mapped against the commercial drivers for the business, looking at which contracts are commercially important. This will enable the business to prioritise its resources and effort in order to minimise the overall potential impact on the business in both the short term and the long term.
Businesses may wish to consider force majeure and relief provisions in their contracts in order to reduce or eliminate liabilities. The position will depend on the specific wording of the clause and the governing law of the contract.
In China, and other jurisdictions governed by civil law, force majeure principles are implied into contracts. Obtaining relief from obligations tends to require that the event or circumstance is beyond the party's control and:
The World Health Organisation (WHO) declared the outbreak a pandemic on 11 March. The term is used to describe a disease that is spreading in multiple countries at the same time. More importantly, it is also a term that is used in commercial contracts as a trigger event for the purposes of a force majeure clause.
It is worth noting that in the aftermath of the 2003 severe acute respiratory syndrome (SARS) outbreak, courts in China held that the outbreak was in the category of an epidemic for the purposes of force majeure. Given the governmental measures being put in palace, and the declaration by the WHO, the coronavirus will almost certainly be classed as a qualifying event. Businesses should consider any specific actions taken with customers or suppliers in response to SARS as this could inform their response to the present outbreak.
In England and other common law jurisdictions, the specific terms of the force majeure clause must be carefully considered. There is no one-size fits all approach. Terms to watch include:
Businesses should ensure they have processes and procedures in place to spot difficulties early on and act on them. Some of the largest supply chain failures in history came about because early warning signs were not aggregated through an official business process and therefore no action was taken.
Businesses should be particularly vigilant about:
Any of these signs may indicate potential difficulties and should act as a trigger point for further investigations and potential action.
It is one thing to have internal systems in place to pick up relevant information on your suppliers, but it is another to use them effectively. Being proactive and ahead of your customers can make all the difference in these situations.
In England and other common law jurisdictions, the specific terms of the force majeure clause must be carefully considered. There is no one-size fits all approach.
Some specific actions businesses can take include:
Specific, appropriate advice should be sought before taking action in relation to any of these options.
06 Feb 2020