2020-03-20
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Coronavirus and tech supply chains: dealing with strains and broken links in the chain

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Posted by Justin Byrne on 20 March 2020

Justin Byrne Consultant

There are 34 individual components in an iPhone, and all of them need to be produced somewhere. Once each element is produced, they need to be combined to create the finished product. Anyone in the business of advanced tech supply chains will be well aware of the logistical headaches this can cause. However, managing these types of supply chains in a pandemic is something else entirely.

Each tech company will have their own way of managing disputes, and each individual supply contract will be probably be on differing terms all the way up and down the chain. Despite this, there are a number of overarching practical and legal considerations that you should bear in mind when making risk-based decisions.

Practical issues

First off, you should consider what contracts might cause you problems. Consider whether one of your suppliers breaching their agreements with you will impact your obligations in other areas. You need to understand what your responsibilities are and the requisite timelines for each.

You should also consider geography as a first point of call, if you have not already done detailed analysis around this. You may already have done all this, but, if possible, it would be beneficial to confirm where each of your suppliers receives their key goods from. This may be achieved by making contact with each of your suppliers and establishing the position before reviewing your detailed contingency planning. Geographic issues may well have a knock-on effect, impacting the time it takes your suppliers to get their goods to you. It may also cause you to then breach your contracts with others.

Supply chains are heavily dependent upon compliance with regulations around the world. Obviously, then, being able to keep up traceability of each component will be key in most industries. The aerospace sector is one example where industry testing is a fundamental necessity. Muddying traceability by recklessly seeking alternative suppliers without engaging in the proper process could actually be more damaging than waiting out the existing delays.

At present, there is no consensus about how long or whether Covid-19 can survive on surfaces. You should consider whether it is appropriate for you to hold your goods in quarantine to avoid increasing the risks to the parties you are contracting with.

Lastly, GCHQ has issued a public statement through the National Cyber Security Centre, about the increased ferocity of cyber attacks in the wake of the Covid-19 pandemic. Consequently, it would be wise to review the security of your systems to ensure that they are sufficiently resilient in light of this current trend.

A range of examples of contingency planning include:

  • Organising business interruption insurance as an absolute first priority;
  • Obtaining alternative sources of goods to enable you to carry on operating;
  • Considering the safety of your staff and any implications of your workforce having to work from home;
  • Communicating to your suppliers about any change in your policies;
  • Consider which elements of the chain can be sped up by utilising technology and online means; and
  • Seeking legal advice in respect of any contracts which you may have to breach as a result of the Covid-19 pandemic.

Legal issues

The practical issues set out above need to be offset against the legal considerations. Generally, you should look at:

  • How much flexibility you have within each of your contracts with other parties;
  • The size of operations, including the scale of each order and whether this is likely to increase or decrease in the circumstances – for example if you supply technology for remote working technology you may suddenly be met with an overwhelming demand;
  • Your ability to make these types of predictions and what impact they will have is contingent on the provisions in your contracts.
  • Your rights to cancel, terminate, suspend, vary, take control of subcontracts, break exclusivity provisions and demand information as required.

In addition to the above generic points, you may also want to examine the below in further detail.

Variation provisions

Changing obligations is an important consideration for tech companies. Many companies will respond to the Covid-19 pandemic differently, and hence it is impossible to truly predict the impact it will have on your contractual relationships. Whatever happens, flexibility and agility will be key.

Seeking advice in a timely manner will give you the time that you need to make proper action plans. It is important to make sure that you have evidence about agreements between the parties. The drafting of these pieces of communication should be undertaken with care: you need to avoid inadvertently waiving your rights or varying the contract.

Force majeure

Many contracts include a force majeure clause. This is often colloquially referred to as an “Act of God” clause. It is dubbed this because it caters for events such as:

  • Natural disasters including hurricanes, earthquakes, tsunamis and volcano eruptions;
  • Wars; and
  • Industrial action.

The above are just a few examples of events that could be included. In practice, the drafting of force majeure clauses may vary greatly. If it is engaged, a force majeure clause is hugely significant because it can release a party (or both parties) from their obligations under the relevant contract. The impact of this is that you may be able to get out of unhelpful contracts during this difficult time, but the same may also happen to you. However, each clause will need careful legal analysis to establish whether a pandemic would be covered by the wording. If it is not and you attempt to terminate on that basis anyway, there may be severe legal consequences.

Frustration

In contract law, there has long been a doctrine called “frustration”. Frustration discharges parties from their obligations under the contract. It is worth noting that this can only be used in very specific circumstances. By way of example, the leading case in this area of law concerns a venue burning down. To come under this doctrine, the services or goods need to cease to exist. It is not enough to say that you cannot supply goods because they are stuck at your warehouse and you are unable to engage a delivery firm. The legal hurdle is extremely challenging to meet.

Most contracts will include express termination provisions. If these are tackled in the wrong way, you may well face a dispute. Similarly, if you simply do not supply your goods or do not pay your suppliers, then you may be in wilful default.

Regulatory issues

As mentioned above, it is likely that regulatory issues will be at the front of your mind when considering supply chain transparency. It may be wise to consider whether any re-testing of products is necessary if you do elect to change suppliers.

Conclusions

There are a range of legal options and practical issues to consider when address Covid-19 related supply chain issues. A thorough analysis of both can help to determine whether a legal or negotiated solution will be best.

About the author

Justin Byrne

Consultant

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

Justin Byrne

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

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