Blog Post

COVID-19 Supply Chain Risk

May 12, 2020

Considering the level of disruption caused by the COVID-19 global health crisis, organizations can’t expect their supply chains to function as intended. In fact, the COVID-19 pandemic has been estimated to impact the supply chains of more than 5 million companies. Managing Legal COVID-19 Supply Chain Risk is going to require informed legal insights; if companies ever needed their general counsels, it’s now. Here’s what GCs should keep in mind when working with their organizations to address the unprecedented challenges posed by COVID-19 on supply chain risks.

COVID-19 Supply Chain Risk: Prepare to issue and defend against force majeure notices

Unsurprisingly, a global health crisis is going to force companies to invoke the clauses designed to protect them in the event that they cannot fulfill their contractual obligations. Your organization will likely need to field and possibly issue numerous force majeure notices.

Different states and countries interpret force majeure provisions differently, sometimes narrowly and sometimes broadly. Researching how force majeure clauses have been enforced in the past in your relevant courts will be critical. Typically, however, courts only enforce force majeure clauses if it has become impossible for a party to carry out their contractual obligations — not if it has become merely more difficult to do so.

Unfortunately, force majeure clauses vary widely, making a one-size-fits-all review of your organization’s risk challenging. We’ve written about this issue before in our article Contract Management: The Lost Decade for Legal.

COVID-19 Supply Chain Risk: Monitor and communicate with your tier 1 and tier 2 suppliers

With the global nature of both the pandemic and modern supply chains, it’s likely that at least one of your suppliers is in a region where COVID-19 has had a significant impact. Tier 1 suppliers are of significant concern, of course, but you should be looking further down the line to your tier 2 suppliers as well and potentially further depending on the scope of your organization’s supply chain.

Communicating with these suppliers, conducting supply chain audits and providing guidance if need be is an opportunity to act proactively during this time. Not only will you be able to potentially avert significant supply chain disruptions, you’ll be aware of where your supply chain needs extra attention and which suppliers are more likely to invoke force majeure clauses with you.

It’s important to remember, too, that the contracts between you and your suppliers were most likely made without taking the possibility of a global pandemic into account. A well-constructed contract should include guidance on what actions to take under numerous circumstances, but the dramatic impact of the COVID-19 pandemic was difficult to predict. Consider the commercial reality facing both you and your suppliers and evaluate whether compromise is a preferable solution to addressing your supply chain problems through legal channels.

Consider the impacts of modifying your supply chain

Some areas have been hit harder by the pandemic than others, but it’s also difficult to accurately predict which regions are going to recover fastest, which might see future spikes in cases and which individual suppliers in those regions will weather the storm.

Many organizations are going to find the idea of diversifying their suppliers attractive. This could mean relying on suppliers from a variety of regions or sourcing their material from several smaller suppliers rather than a handful of large ones.

When considering this switch, it’s important to weigh the legal ramifications. Sourcing from suppliers in different countries and states will require knowledge of and compliance with a corresponding variety of laws and regulations. You’ll also need to assess the capacity of your organization’s legal team. Can you handle the additional work required to manage contracts with these different suppliers and the regulations of these different regions?

Revise your transfer pricing policy

As your supply chain changes, so too will your transfer pricing. In order to meet all the requirements of tax authorities, you’ll want to comprehensively document all events that affect your organization’s transfer pricing and your reasoning for making any changes.

As mentioned above, deliberately moving any elements of your supply chain to different jurisdictions could impact your transfer pricing, as well as any travel restrictions, IP and brand changes or any other event that affects what your organization charges at arm’s length.

More than just the supply chain

For many organizations, COVID-19 supply chain risk will be felt widely. Given the scope of the pandemic, however, it’s almost certain that nearly every legal facet of your organization will be affected. We’re especially interested in how organizations can maintain healthy contract management practices during this challenging time — read our guide Contracts: During & Beyond a Pandemic to learn more about how you can minimize your organization’s risk.