How To Position Your Company To Address Supply Chain Disruptions

The pandemic has been a logistics nightmare for companies large and small. Here are some legal doctrines and steps that can help.

The recent COVID-19 pandemic has disrupted the world economy and substantially impacted business dealings in the U.S. and around the world. Indeed, various government-mandated closures and other decrees are making business contracts difficult, if not impossible, to perform in certain instances. Companies are facing disruptions that can cause a complete inability to supply promised goods to their customers. There are some legal doctrines and steps that can help suppliers during this time period.

Understand Your Leverage Position

To most effectively respond, a company needs to obtain a business view of the severity and timeframe of the disruption. Consider involving subject matter experts in the business as well as legal advisors to optimize a response strategy.

Oftentimes, “force majeure” or similar clauses in contracts address exactly this type of situation, but often include formal notice or other requirements before invoking. Note that force majeure clauses are typically governed by a particular state or country’s law, which dictate a different outcome depending on the jurisdiction. Make sure you know the parameters of the law. Most clauses do not address a “pandemic” or “epidemic”—this area of the law is not particularly well-developed but will likely be litigated in the near future. However, government shutdown or decrees may be covered.

Also, the legal doctrines of impossibility and frustration of purpose can provide a defense to a company for not performing under a contract.

Consider the situation from your business partner’s perspective.  This involves considering what the counter-party will want (and is legally entitled to obtain) in such a situation.  Moreover, could they perform or pay you?

Make a Plan for The Most Likely Contingencies 

Once the position is understood, a company should develop a multi-disciplinary plan. The safety and security of your employees and business partners should be the paramount concern. Consider a “decision tree” set of options to your business party’s likely response and whether a public-relations professional or crisis manager should be involved. Often, “in the can” holding statements in response to specific requests from the media will ensure that decisions do not need to be made on the fly, especially in the quick timeframes such requests provide. Decide who your company’s spokesperson should be in this context.  Also, if you do not have an outside media expert, now is the time to retain one on standby.

If your company is publicly-traded or has other disclosure requirements, consider whether disclosures are affected. The SEC, IRS, and others have recently changed rules and provided substantial guidance relating to COVID-19. Serious disruptions may trigger disclosure obligations. Similarly, consider identifying financial and legal advisors to address specific situations as well as to vet such critical advisors ahead of time.

Communicate With Accountability

Many business partners have been accommodating of the extreme circumstances that COVID-19 brings to the business community, as well as the realization that most long-term relationships will survive past the current crisis. A failure to deliver may be mitigated by potentially reduced demand or availability of near substitutes in a mitigation plan.

It is far better to over-deliver than have to push out deadlines further—a business partner may reasonably argue that its ability to mitigate (and lessen any potential damages) was hampered by a failure to convey the true scope of the issue. Figure out which communication channel will best be positioned to provide the news to your business partner; typically, though not always, that will be the commercial head with the longest-standing relationship with the business partner.

If there is substantial uncertainty regarding when things will be resolved, consider saying that at the very beginning. Your business partner may have a duty to mitigate any losses, so it is important to sometimes send formal notice.

While risk can never be eliminated, the more prepared a company is for a supply disruption, the more easily it can adapt to the new “normal.”

 

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.

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Yvette Ostolaza is the managing partner of Sidley Austin’s Dallas office, a member of the firm’s management and executive committees, and co-head of Sidley’s global litigation practice. David Sillers is counsel in Sidley Austin’s Dallas office and is in the complex litigation and disputes practice.