Suppliers should put risk value in contracts following horsemeat scandal, says expert

Out-Law News | 24 Jan 2013 | 5:18 pm | 3 min. read

Purchasers and their suppliers should put a value on risk and include that in contracts in case of disputes such as that over horse DNA being found in beef burger products, an expert has said.

Supply chain management expert Richard Parkinson of Pinsent Masons, the law firm behind Out-Law.com, said that purchasers and suppliers should be reviewing the terms of their contracts with one another to put a value on the risks to which they are exposed. This valuation would be used if things go wrong in the supply chain, such as in the burgers scandal enveloping retailers and food processors.

Parkinson said that companies in all sectors, not just the food industry, should be clear about what risks they are willing to accept liability for when drawing up supply contracts. He said it is possible for retailers and suppliers to recoup at least some of the costs they incur when products are withdrawn from sale because of issues stemming from the supply chain.

Last week the Food Safety Authority of Ireland (FSAI) reported that it had found horse DNA in some beef burger products that were being sold in the UK and Ireland. Although it said that the presence of the component in the products presented "no risk to public health", it prompted Tesco to remove some beef burger products from sale and offer refunds to customers who had already purchased them.

Earlier this week Burger King announced that it had taken the "precautionary" and "voluntary" decision to change its supplier of beef as it said the previous supplier was under investigation for "potential contamination of some retail products".

Parkinson said that the cases should provide a "wake up call" to both retailers and suppliers, not just in the food sector, and that they should each assess their contractual ability to allocate the risks associated with the production process equitably through the supply chain.

"Companies in the supply chain should be looking at their contracts to see what ability they have to pass through any claims they are issued with for costs incurred by retailers when they issue product recalls," Parkinson said. "The costs can relate to the time and effort involved in recalling products and providing customer refunds, as well as lost profits on sales and a loss of reputation that can occur, although the latter is difficult to quantify."

"The firms should also seek to ensure that the future contracts they set up are robust, enable them to limit their responsibility for the parts of the overall supply process they are involved in, and allow them to pass on any costs they are not responsible for to suppliers further down the supply chain," the expert added. "In a food production context this could involve suppliers to retailers passing on the risk to meat or additive producers that they contract with."

"In addition, those producers should ensure that their own suppliers are contractually obliged to help them meet their regulatory requirements, which may in practice mean requiring those suppliers to retain documents and records of where they source component parts of products, for example," he said.

Parkinson said that although there is often a major "power imbalance" between retailers and their suppliers, the suppliers should assess what risks they are willing to expose themselves to under the terms of their contracts and whether any of those risks can be passed on to others in the supply chain. He also said that companies should have "testing procedures" in place to "nip in the bud" issues that emerge in the supply process.

"Each member of the supply chain should look at the potential risks involved in product manufacturing, not just in the food industry, and be clear on the risks they are willing to assume liability for when drawing up contracts with purchasers or suppliers," Parkinson said. "A producer that supplies directly to a major retailer does not want to find it is left responsible for failings by companies further down the supply chain."

"Companies throughout the supply chain should have quality control procedures in place to mitigate the risk of things going wrong and ensure those procedures are of an appropriate standard for the industry they operate in. They should also look to obtain insurance that may cover costs they would be liable for, under the terms of their contracts with purchasers, for product recalls or other problems," he said.

Parkinson said that it can be difficult to put a value on the costs associated with intangible risks, such as a loss to reputation that can arise when problems occur with products.

"Whilst it is relatively easy to measure the costs associated with withdrawing products from shop shelves and in calculating lost profits on potential sales as a result, it is less easy to quantify the costs associated with a loss of reputation or damage to a brand that can occur when companies are involved in product recalls, particularly high-profile cases," he said. "Companies may have to deploy forensic accounting measures in order to put a value on the impact such cases can have on their business and the extent to which they themselves are willing to assume liability for those costs."