Following the new restrictions implemented under the Health (Preservation and Protection and Other Measures in the Public Interest) Act 2020, regarding the closures of non-essential retail outlets and facilities, businesses may now be required to make changes in order to ensure the effectiveness of their supply chains.
It is critical for businesses to understand their supply chain. In order to do this, businesses must identify key suppliers, consider where they are situated and the various government initiatives in place. This due diligence in assessing challenges such as crucial suppliers, ability to meet customer demands, IT issues and cash flow problems will enable businesses to create innovative solutions and identify the potential risks your business’s supply chain may face during this time of uncertainty.
Agility in your Supply Chain
Supply chain disruption is likely so consider back up supply chain alternatives in advance. While considering the extent to which supplies could be replaced with those from another supplier or location, ensure these are properly documented and risk assessed to maintain transparency and traceability of the supply chain particularly in evidencing compliance with product safety regulations.
During this time making decisions to ensure the continuity of your business in delivering critical services or products is key to senior management decision making. But ensuring these are informed decisions will better position your business from a possible legal challenge in the future. The legal implications will generally be very fact specific, but this should not be a bar to putting in place an effective response to COVID-19. A flavour of issues is set out below:
- Change, Waiver and Variation
If a business fears it will not be able to meet demands under their contracts or financial covenants a waiver or variation to contractual terms may be a more suitable remedy to prevent a breach or default. Many contracts have provisions that allow for change or variation of their terms, or waiver of performance. However, an analysis of each contract should take place as you should fully understand and comply with the conditions and requirements needed in order to make those changes or seek waivers. There should be discussions regarding possible changes in arrangements with contractual partners along the supply chain to decide whether you intend to enter into a legal obligation to vary your contract or waive your rights. However businesses must be careful not to inadvertently agree to changes of a temporary nature which are binding on a more permanent basis.
- Force Majeure
A Force Majeure clause is generally found in most contracts across the supply chain, we discussed these recently in more detail here. An issue coming to the fore in this turbulent climate is whether COVID 19 will fall within the definition of an “Act of God” or “pandemic”. Force Majeure clauses are very fact specific and it is not the case of one size fits all. The strength and applicability of such a clause needs to be examined on a case by case basis.
- Frustration and Wrongful Termination
If a contract does not contain a Force Majeure clause it will not be implied into the contract, but an alternative remedy of frustration may be available. Frustration may be invoked where an unforeseen event occurs which renders a contract impossible to perform. It is a very high threshold to meet as the fact that contractual duties are more onerous to perform in this economic climate may not be enough to satisfy this test. This remedy is rarely invoked as it has substantial impact including bringing a contract to an end even after the event which gave rise to non-performance no longer exists.
Communication is Key
Open communication and collaboration with the parties that make up the supply chain will allow businesses to understand the gaps that may occur and decipher whether demands cannot be met. This will allow the organisation time to consider alternative supply sources and to draft plans to mitigate exposure. The ability to develop a flexible and dynamic supply chain model will limit disruption in the business.
Consider the communications you need to make to your customer base. In certain industries there are legal obligations to provide notice of any reasonably suspected risks to supply or services and to provide mitigation plans and clarity on potential impacts.
With surmounting pressure on businesses IT systems enabling remote access, flexible working arrangements and upholding customer satisfaction it is easy for businesses to lose focus on regulatory requirements. Having robust IT systems in place that allow staff to carry out their work including supplier assurance and due diligence in as similar a manner as before is crucial. The Data Protection Commission has provided guidance that any measures taken in response to COVID-19 involving the use of personal data need to be “necessary and proportionate” and informed by the guidance and/or directions of public health authorities or other relevant bodies. Organisations must have regard to the laws in place and abide by the regulatory authorities’ advice. You will need to ensure that technical standards required (e.g. ISO) are met and in certain regulated industries that substitutions meet normal regulatory standards as well. Be mindful that licences or authorisations that relate to your current suppliers or a change in supply may require retesting of products.
Businesses must conduct due diligence in assessing challenges such as crucial suppliers, ability to meet customer demands, IT issues and cash flow problems in order to find solutions to any supply chain problems. Understanding what’s permissible under the contract in place with your supplier is paramount. Communication with both parties in the supply chain and customers will be key in minimising legal risk. Businesses must continue to comply with regulatory requirements and any advice or guidance received by the relevant authorities.
Our partners, associates and our support teams are available as usual to support your business. We also have a specific COVID-19 Hub to help you.
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