The breakdown of the global supply chain brings with it a myriad of business and legal challenges for purchasers and suppliers alike. The following are some of the major issues that your company must consider.
- Contracts and Legal Arrangements. The global supply chain is based on a daisy chain of contractual relationships (both formal and informal) between suppliers, buyers, and customers. In some circumstances, suppliers are independent, and other times are partially or wholly-owned by their customers. A complete understanding of the documents governing these relationships is the first step to determine what remedies and defenses exist when obligations are not met.
- Unique Contractual Provisions Governing Supply Chain Relationships. In addition to standard contract clauses regarding quantity, price, and delivery, supply chain contracts commonly address the following:
- Intellectual property – Trade secrets may need to be shared with manufacturers in order for them to create your product. These provisions should address who owns the intellectual property and what the ramifications are for improper disclosure.
- Liability for shipping costs, insurance – Specifies which party is responsible for shipping costs and whether (and what types of) insurance is required for the goods in transit and/or storage.
- Warranties and disclaimers – These may include express and implied warranties for goods provided.
- Force Majeure – These clauses typically address unforeseeable circumstances that prevent someone from fulfilling a contract.
- Default – Defines what consists a violation, or breach, of the contract in a supply chain relationship.
- Conflict resolution – Will dictate the governing law of a conflict and the forum in which conflict will be resolved.
- Damages – Damages may be limited to the cost of goods sold, or could include lost profits resulting from the breach. This clause may also require a party to attempt to mitigate their damages and reduce the recovery possible from their adversary if they fail to do so.
- Termination – Define how the relationship can be ended and the penalties for same.
- Protection of Intellectual Property in Supply Chain Contracts. Supply chain contracts typically address the ownership and use of intellectual property. Oftentimes, it will be necessary for your company to share its trade secrets or patented information with your manufacturers in order for them to create your product. For example, you may have shared the secret design of a product component with your manufacturer in China, who then spends months creating a machine tool to manufacture that component. If that Chinese company is forced to close its doors due to the pandemic, what happens to that machine? How will you protect your design? Keep in mind that from time to time the protection of intellectual property will also extend to physical property that reflects those unique designs and trade secrets. For example, if specific fixtures and jigs were built custom to your product manufacture, they comprise part of your intellectual property. The same is true for injection molds for plastic that may both have unique designs as well as your company logo or trademark incorporated into that mold. To the extent feasibly possible, if the supplier is no longer in business and unable to supply the parts, these elements should be retained and retrieved if that can be done.
- Financial Issues Related to Supply Chain Contracts. Your supply chain contract must clearly address payment terms. Typically, payment for goods is due upon delivery or inspection. These terms must be carefully reviewed. Some companies on the brink of failure may be unable to fulfill orders without prepayment. What are your remedies if the supplier takes your money but cannot deliver?
- Transportation and Shipping Issues. Your supply chain contracts almost certainly will include a delivery time requirement and should address the ramifications of late (or failed) deliveries. Most global supply chain contracts provide for payment only upon inspection or upon receipt of the product at the customer’s location. Who is responsible for failed or delayed inspections, or stolen or lost cargo? If your contract does not specifically address these issues, the laws governing your transaction must be reviewed to determine whether you have any remedies.
- Tax Implications. When switching suppliers from one country to another, you may face new tax issues due to variations in taxing structures. Therefore, you are well advised to review the tax implications of doing business in each country to understand its impact on the price you pay and to ensure you are in compliance.
- Termination of Supply Chain Contracts. Your supply chain contract should address the process by which it can be terminated. You may need to fulfill certain formal notice requirements or allow the supplier to cover before the relationship can be terminated. Alternatively, your supplier may seek to terminate their relationship with you because they are going out of business or simply unable to complete orders. Any remedies you may have in that situation will be defined by the contract or applicable law.
- Conflict Resolution. Most international supply chain contracts will dictate whether commercial disputes are subject to arbitration or resolution through the court system and which country’s laws govern the dispute. Non-U.S. companies typically prefer arbitration over the courts. In the event of a dispute with another party, you should carefully review your dispute resolution clause and the applicable jurisdiction’s laws to determine your rights, remedies, and obligations.
- The Application of Force Majeure Clauses in Contracts. As translated from the French language, a “force majeure” clause literally means “superior force,” but more often is known to mean an “Act of God.” It is a common provision in international contracts. Force majeure will typically address unforeseeable circumstances that prevent parties from fulfilling a contract. These clauses and their specific interpretations will be the subject of heated litigation as the economic impacts become worse. Some commercial contracts specifically exclude a “pandemic” as an unforeseeable circumstance. However, there may be other ways to invoke the force majeure clause, like nationwide quarantines, government-imposed shutdown of certain businesses, or “social distancing” measures which lead to the closing of factories. You will need to review the specific language of each of your contracts to determine if a recovery may be made (or claim defended) under that clause.
- Immigration Issues. With immigration bans being imposed due to COVID-19 and the increasing trend toward nationalism, it will become more difficult to find skilled workers to staff your company (or your vendor’s company). As you consider the supply chain’s effect on your business, do not forget to consider your employment pipeline.
- Tariffs and Taxes. As a result of the pandemic and its effect on the American economy, the U.S. government continues its trend toward more protectionist economic policies, including increased tariffs on certain countries to encourage domestic growth. These tariffs not only increase the cost of goods from the targeted country, but they also have a ripple effect as other nations realize that they can raise their prices to match.
- How Asian Countries View Supply Chain Contracts. Standard form contracts may vary between countries in Asia (and between companies). Companies located in different countries may require you to make payments in different ways, or to resolve disputes through arbitration that takes place in that country. Therefore, you must have an understanding of the laws of the new countries in which you plan to do business.
- Inspection Issues. Due to decreased staffing, there has been a delay of shipments of goods from overseas as fewer inspections take place in the local plants. The cargo must again be inspected when it arrives at port, causing further delay.
- Noncompliance with Pandemic-Related Regulations. As economies across the globe reopen, companies may attempt to accelerate production in order to fulfill contracts. In doing so, they may defy social distancing or other pandemic-related, government-imposed restrictions. Depending on local regulations, the company could suffer large fines or even be shut down due to failure to follow these restrictions, completely eviscerating their ability to supply goods. You could find yourself without a supplier just when you thought you had solved your problem.
- Specific Provisions to Consider in Future Contracts. If your existing contracts lack any of the provisions discussed in this article, it is incumbent on you and vital to the survival of your company to revise those contracts now, and include them in any contracts with new vendors.