Critical issues facing essential suppliers in the COVID-19 pandemic

Publication April 2, 2020

Suppliers of essential goods and services face unprecedented demand in an environment where exceptional measures need to be taken to safely and effectively meet that demand. Supply side response to the coronavirus (COVID-19) pandemic calls for time pressured legal review and judgment calls that may later come under intense scrutiny. This article highlights key legal issues for an in-house counsel to consider in guiding an essential supplier through the crisis.

A key link in your supply chain fails to perform

COVID-19 and associated government restrictions produce an environment ripe for claims that contract performance is excused under a force majeure provision or under the common law doctrine of frustration of purpose. A force majeure provision is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled. The common law doctrine of frustration of purpose, recognized in many states, terminates a contract when an event:

  1. is unexpected;
  2. is beyond the parties’ control; and
  3. makes performance impossible or radically different from that which the parties contemplated at the time of entering into the agreement. 

Assessment of key supply-side contracts should include whether:

  1. the contract contains a force majeure provision;
  2. pandemic or similar concepts are included among the reasons for excused performance; and
  3. contractual notice requirements are present and have been met. 

An assessment of whether or not the COVID-19 pandemic has made performance under a contract actually impossible/radically different, or just less convenient and/or more expensive, should also be considered. For example, performance under a contract that requires the delivery of certain goods on a specific date that is now impossible due to local lockdown measures, may likely be excused as a force majeure event. However, if certain executive order restrictions or COVID-19-related ordinances merely impact a supply chain by causing the cost of performance to increase or by causing a delay, that may not meet the threshold force majeure standard.

Understanding key supply chain contracts may prove critical to an essential supplier maintaining successful distribution and avoiding a wholesale renegotiation of contracts, where the risks were adequately addressed and allocated in existing contracts.

Contracting during the pandemic 

An essential supplier should customize contract terms with service contractors and sub-suppliers  requiring performance and risk allocation suitable for the pandemic. If a supplier utilizes standard contract terms and conditions, including master services agreements, consider adding specific terms to an addendum or statement of work that expressly takes precedence over general terms and addresses the following:

Force majeure carve-out

If a contract is being entered into to further continuity of the supply chain amid the COVID-19 pandemic, consider including a COVID-19 carve-out in the force majeure provision where the contractor agrees not to use the pandemic as an excuse not to perform.

Sanitation and health measures

Include contractual provisions that require contractor to establish state-of-the-art sanitation and health practices and abide by supplier’s standards when contractor is in supplier’s warehouse, store or other facilities.

Changing regulatory landscape

Consider placing the onus on your contact counterparty to know and abide by rapidly changing regulation, as well as, local, state and national executive orders and emergency declarations.

Indemnification

Make certain that the risk of loss tied to additional requirements incorporated into the contract flows into an indemnification provision that complies with the express negligence rule.  

Making a case for recognition as an essential supplier

A dizzying array of state and local COVID-19 restrictions have been implemented that balance maintaining the continuity of essential businesses with slowing the rate of infection. While the essential nature of certain business is obvious, others fall in a gray area or simply were not top of mind by state and local officials when enacting executive orders. For example, any business that facilitates people working remotely may be essential to the effectiveness of a local stay-in-place restriction, including a supplier of computers, monitors, office supplies or furniture. Many such businesses can operate safely under social distancing requirements. Local officials have granted exceptions to stay in place orders once being made aware of the essential nature of a business and safe operation across multiple jurisdictions. 

Navigating local restrictions and errant enforcement

In many parts of the country, courts are available to hear applications for temporary restraining orders and temporary injunctions. If a public official oversteps his or her authority and interferes with the conduct of an essential supplier’s operations, the courts are available to remedy such situations and a government official acting without authority is not immune from suit. Also, consider arming employees with documentation stating their important job function in the business of an essential supplier to present to law enforcement, if necessary.

Managing supply-side representations

No essential supplier can guarantee the safety of every customer despite best efforts; no customer should expect to utilize an essential supplier without some risk of infection. That being the case, it is still important for a supplier to carefully craft public representations to avoid creating evidence for future litigation. Statements concerning outcomes that cannot be guaranteed should be replaced with factual statements about processes.  Factual statements about processes would include describing a delivery as a “doorstep delivery” or generally outlining sanitation measures undertaken, rather than describing the outcome of those processes.

Essential suppliers that are publicly owned should promptly evaluate the continued accuracy of past representations concerning the supply chain and consider whether it is necessary to issue further public statements to disclose material information to the investing public and cure any prior statements that under the present circumstances could be characterized as misleading. 

Conclusion

The pandemic is far-reaching and is having impacts across businesses – affecting employees, all operations, supply chains, customer relations, compliance, and ultimately, significant impact on financial performance, at once. By addressing both legal and operational considerations through your legal team, an essential supplier can maximize the chance that business continuity deliberations made during the crisis will be protected by legal privilege if litigation ensues.  Managing risks to ensure business continuity in this exceptional environment must integrate legal analysis with operational, compliance, and control skills, to ensure solutions are truly effective at mitigating risk while also maximizing business continuity and financial resilience.

 


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