Managing Supply Chain Disruptions in a Crisis

Businesses today are increasingly dependent on global manufacturing, cross-border transportation, and widespread supply chain networks. An earthquake, flood, wildfire, pandemic (such as 2019 novel coronavirus disease (COVID-19)), or other public emergency or disaster can cause significant disruptions in the company’s supply chain, affecting:

• The company’s ability to produce goods and provide services to meet customer needs.
• Its suppliers’ ability to provide raw materials, components, finished product, or services.
• Its logistics providers’ ability to deliver goods.
• Its customers’ demand for, and ability to take and pay for, goods and services.

This Note discusses key legal and business issues a US company should consider in preparing for and responding to the effects of a crisis, disaster, or public emergency on its supply chain.

This Note does not address employment law issues that arise in a crisis or general business continuity issues for the entire company.

Understanding the Scope of Supply Chain Disruptions

Companies should carefully consider the effects of the crisis on their supply chain and identify the exact cause and nature of any problems. Evaluating the facts and circumstances of each supply chain contract and business relationship can help the company make informed decisions to minimize its risks and maximize its rights during a disruption. In performing this supply chain review, the company should:

• Evaluate the company’s ability to perform its own contractual obligations. For example:
  • government measures in response to the crisis, such as mandated lockdowns, may force the company to close its factories or other facilities;
  • worker shortages may occur if employees are not coming to work due personal or family illness or injury, quarantine, fear of contamination or safety, or public measures that have shut down schools or public transportation;
  • suppliers may discontinue shipments, leaving the company unable to produce or obtain goods; and
  • the company may owe indemnity obligations to other parties and should notify its insurers of these losses (see Insurance Coverage, below).
• Identify the company’s affected suppliers. This can help the company:
  • determine if key suppliers of critical parts and materials to the company are adversely affected by closures or delays, may have trouble performing under the contract, or may seek to terminate or suspend the contract;
  • calculate the amount of excess inventory or supplier’s safety stock that it can access if suppliers must stop production; and
  • discuss with suppliers their business continuity plans;
• Identify the company’s affected parts or materials. This can help the company determine:
  • if substitute parts or alternative supply sources are available;
  • if certain company products can no longer be produced because they need these parts or material; and
  • how this affects the company’s sales and margins.
• Identify the company’s affected logistics providers. This can help the company understand how the crisis may delay or halt deliveries (including the import and export of goods) and disrupt services. The company should consider whether:
  • cargo is being discharged at alternative or interim ports, with expensive consequences and significant logistical and insurance implications;
  • if the crisis involves a disease outbreak, delays in other countries are resulting from quarantine and port checks due to cases, or suspected cases, of the outbreak among crew and passengers on board vessels;
  • government-ordered lockdowns are causing a lack of manpower at relevant discharge ports (such as a lack of onshore personnel to operate the receiving facilities or lack of maritime pilots to help vessels navigate port waters and berth safely);
  • regulatory actions are causing import and export clearance delays; and
  • state-imposed crisis-related trade barriers are disrupting its supply chain.
• Identify the company’s affected customers. This can help the company:
  • determine how it should prioritize customers to receive limited products, taking into account any contractual agreements;
  • inform each customer as early as possible whether and when they can expect delivery disruptions; and
  • monitor customer demands to determine if they can pay for or take delivery of goods.
• Review insurance-related obligations and rights. For example, the company should:
  • identify and review insurance policies that may cover damages related to that crisis (see Insurance Coverage, below);
  • determine whether the company is obligated to provide insurance coverage or indemnification to supply chain partners for risks related to that crisis; and
  • determine whether the company is entitled to insurance coverage or indemnification for crisis-related risks from supply chain partners. If so, the company should request and review copies of relevant insurance policies (not just certificates of insurance to assess potential coverage).
• Keep detailed records, documents, and supporting evidence of crisis-related expenses. In particular, document:
  • the cause and scope of the interruption to the business;
  • any losses the company suffers, so it can support its damages claim should litigation be needed;
  • any related costs that the company may have; and
  • any efforts to comply with contract terms or to find other means by which to comply.

Upstream and Downstream Contract Terms

The impact of a crisis on a company’s supply chain and the parties’ ensuing rights and obligations under the relevant contracts are fact-specific. They often depend on the language of the force majeure, governing law, and dispute resolution provisions and other key terms agreed in the contract. To help the company plan its response when a crisis disrupts its supply chain, counsel should:

• Understand contractual terms with suppliers and customers. For example, identify:
  • the key provisions that may be relevant during the crisis (such as representations and warranties, covenants, exclusivity, payment rights, liquidated damages, schedule and delivery terms, allocation rights, force majeure clauses, termination rights, and insurance or indemnity clauses);
  • the customer contracts that have severe penalties for late delivery;
  • the contracts that contain force majeure clauses and the specific events that trigger a force majeure (see Force Majeure Clauses, below);
  • other circumstances that allow the parties to default on their obligations (see Other Defenses for Non-Performance, below);
  • any notice requirements that have been or may be triggered; and
  • the choice of law, forum selection, and dispute resolution provisions for each contract, which determine the availability and scope of a force majeure or other defense, including whether immediate relief is available.
• Map the contract analysis against the company’s business priorities. This helps the company to:
  • identify the contracts that are commercially most important;
  • prioritize its resources and efforts; and
  • minimize the short- and long-term impact of the crisis on the business.
• Identify any local statutes and regulations that apply, both under governing law and in the place of operations. Because many contracts for the sale of goods also must comply with various local statutes and regulations, the company should:
  • identify any action it needs to take that affects its contractual obligations, such as health and safety measures during the crisis;
  • assess if the Uniform Commercial Code (UCC) or any state’s adaptation of the UCC applies (see Impracticability, below);
  • assess if the United Nations Convention on Contracts for the International Sale of Goods (CISG) applies (see UN Convention on Contracts for the International Sale of Goods, below); and
  • monitor for new regulatory requirements that may take effect.

Force Majeure Clauses

In every business transaction, events beyond a party’s control, commonly known as force majeure events, may occur that prevent a party from performing the contract. A contract may include an express force majeure clause that can relieve a party from liability for non-performance or delayed performance due to a force majeure event.

Companies that are considering issuing force majeure notices and those that are receiving them should review the relevant contracts and consider these key issues:

• Whether the contract contains a force majeure clause. For example, supply arrangements entered into with only purchase orders and invoices may not include force majeure clauses. If the contract is silent on force majeure, a court may render its decision whether to excuse an impacted party’s performance during the force majeure event based on other factors, such as the foreseeability of the event.
• What force majeure events are specified in the contract. A crisis may be:
  • specifically listed as a force majeure event in the contract; or
  • covered by general force majeure “catch-all” wording in the contract.

(See When Is a Crisis a Force Majeure Event?, below)

• Whether the crisis was foreseeable. The contract may exclude events that may have reasonably been provided against, avoided, or overcome. This may affect the allocation of risks not listed that the parties were aware of:
  • at the time of contract negotiations; or
  • in new contracts entered into after the specified risk becomes well known and therefore foreseeable (such as new contracts entered into after the onset of a crisis).
• Causation. The impacted party may need to:
  • show a causal link between the crisis and the impacted party’s failure to perform (there should not be too many steps between the crisis and the non-performance); and
  • establish that the crisis prevented, hindered, or delayed performance as required by the language of the contract.
• For example, if the contract provides that the force majeure event:
  • must prevent performance, the impacted party must show that performance is legally or physically impossible (that is, it was unable to source staff, equipment, or materials from elsewhere to perform), not just difficult or unprofitable (for example, increased cost to obtain materials is not a sufficient claim); or
  • hinders or delays performance, this gives the impacted party more leeway to only show that performance is substantially more onerous.
• Any duty to mitigate. The impacted party may be required to show that it took reasonable steps, in good faith and with due diligence, to mitigate or avoid the effects of the force majeure on its contractual performance.
• Exclusions. The parties must determine whether any exclusions set out in the force majeure clause affect the parties’ rights and obligations during a crisis. For example, force majeure clauses typically do not excuse a party’s:
  • payment obligations under the contract; or
  • obligation to perform despite changes in economic circumstances.
• Notice and response requirements. The parties should review these requirements to ensure the timeliness, complete content, and proper delivery method of any:
  • force majeure notice (invoking the force majeure defense) to avoid an argument that it waived its force majeure defense; or
  • response to a force majeure notice (see Responding to Force Majeure Notices, below).
• Governing law. The choice of law, choice of forum, and dispute resolution provisions agreed by the parties in the contract inform how a force majeure clause is interpreted. Industry or trade practice may also be relevant to the interpretation of the force majeure clause.
• Consequences of a force majeure. Parties should understand that establishing force majeure may:
  • lead to temporary relief from performance, avoiding the risk of a default termination, and extend the time to complete performance;
  • give rise to a right of termination (typically by the other party, but sometimes by either party) if it continues for an extended period (for example, 90 to 180 days). If the parties do not wish to terminate, they should discuss to agree on new performance terms);
  • affect how liquidated damage provisions apply and work together with force majeure; and
  • affect other agreements and legal obligations (for example, financial agreements that require the company to provide notice of material events that may lead to litigation or anticipated loss outside of the ordinary course of business).

When Is a Crisis a Force Majeure Event?

The relief available under a force majeure clause varies substantially depending on the wording of the clause. If the clause contains:

• An exclusive or finite list of qualifying events, the crisis must fall within the scope of a listed item.
• A non-exclusive or unrestricted list, the crisis must either be included on this list or of the same kind or nature as the specifically listed events (although some clauses include language that aims to capture “similar and dissimilar” events).

The analysis is more complicated if the list includes catch-all language. For example, the parties may draft a finite list to include:

• “Pandemics.”
• “Acts of God,” which is catch-all language frequently added to the list to cover natural disasters and events not specifically listed in the provision.
• The catch-all language “other similar events.”

In this scenario, for example, a party may be impacted by a disease outbreak that affects the party’s performance. The parties must determine whether the outbreak is an epidemic or a pandemic. If it is an epidemic, the impacted party must show that the parties intended to include epidemics (a narrower event than a pandemic) in the finite list’s catch-all language.

The company should monitor the situation as facts and circumstances can change rapidly during a crisis. Depending on a party’s location and local conditions, it may not be able to invoke a force majeure clause at a given point in time. However, as the crisis continues, the company may be more likely to prevail on a force majeure declaration if:

• Additional government declarations restrict travel, force closures, and cancel events.
• For parties in the US, relevant states declare states of emergency, restrict travel, and shut down transportation, schools, and other services.

Responding to Force Majeure Notices

If the company receives a force majeure notice from an impacted party claiming to be unable to perform its obligations under the contract due to a crisis, the company should:

• Not accept unspecific force majeure declarations. Instead, obtain relevant facts before taking a position on the force majeure declaration. Request that the impacted party provide:
  • evidence of the circumstances that prevent performance, including the number of impacted facilities, people, parts, and materials;
  • the time period during which its performance is to be delayed, if required by the force majeure clause,
  • information on how the supplier intends to allocate any limited stock;
  • regular updates on its efforts to resume performance and mitigate the impact of non-performance; and
  • supplemental information as it becomes available.
• Conduct a preliminary contract analysis. For example, assess whether:
  • the crisis qualifies as a force majeure event under the contract (see When Is a Crisis a Force Majeure Event?, above); and
  • the crisis and the non-performance fall within the contractual requirements and limitations relating to a force majeure claim (see Force Majeure Clauses, above).
• Be prepared to issue back-to-back force majeure notices to avoid breaching its downstream arrangements. The company should be aware that:
  • each contract in the supply chain may be on different terms or subject to different governing laws;
  • there may also be separate time bars or other procedural requirements for invoking force majeure;
  • these differences can create substantial challenges for the company, especially where its downstream contract has less favorable or no force majeure clauses; and
  • if the company must issue a force majeure declaration to its own customers, it should avoid any language that may prejudice its position in a future dispute with its suppliers.
• Be open to alternative resolutions. If suppliers and customers along the supply chain and across jurisdictions are having trouble performing their contractual obligations, the company should:
  • to ensure an enterprise-wide, consistent approach, implement a global strategy for communicating with these suppliers and customers, even if the contracts are usually handled locally;
  • keep open communications to understand how they are affected, including suppliers’ details of production issues and inventory levels and customers’ descriptions of liquidity and consumer demand;
  • where appropriate, consider negotiating written amendments to the contracts to reflect a commercially sensible resolution; and
  • consider how the company intends to enforce the contracts if any force majeure claims are not valid.

(See Supplier and Customer Relationships, below.)

• Be mindful that this may become a dispute to resolve in arbitration or litigation. The company should follow standard procedures for managing a potential dispute, including for example:
  • preserving all relevant records;
  • framing its response to protect its legal position (being careful not to inadvertently make statements or promises that may later form the basis for the other party to claim that the company agreed to waive any contractual rights); and
  • if the parties reach a verbal commercial resolution, sending a written communication to the other party memorializing the discussions and seeking to amend the contract in writing.

(See Additional Steps to Protect the Company, below.)

Other Defenses for Non-Performance

If the contract is silent on force majeure, a court decides whether to excuse an impacted party’s performance based on other principles, such as impossibility, impracticability, and frustration of purpose. These excuses for non-performance may have different interpretations under the applicable law, but in general are narrowly interpreted and applied.

Impossibility

The contractual obligations of a party can be excused if its performance becomes objectively impossible because of a supervening event beyond its control. In general, impossibility discharges an impacted party generally where, without its fault:

• In a contract requiring the personal performance of the promisor, the promisor dies or is incapacitated. For example, there may be a valid impossibility defense if a person necessary to performance becomes incapacitated, ill, or quarantined, or dies because of the crisis.
• In a contract where performance requires the continued existence of a specific thing, that thing perishes or is otherwise unavailable for performance. For example, this may include the destruction of an irreplaceable good or component in an earthquake or a flood. Impossibility generally does not include the destruction of interchangeable or generic inventory or the inconvenience of sourcing replacement parts.
• Performance is later prevented by an unforeseeable event or prohibited by operation of law. For example, if the contract is to be performed in a region where there is a state-imposed lockdown, performance may be impossible for the impacted party.

However, courts apply the doctrine of impossibility narrowly, and impossibility arguments are rarely successful except in extreme circumstances. For example, New York courts have required that an impacted party seeking to be excused from performance for impossibility demonstrate that it took virtually every action within its power to perform.

Impracticability

In the US, the UCC excuses performance by a seller of goods where it can demonstrate that performance may be so difficult and expensive that it becomes impracticable, though technically possible. This impracticability standard can be more easily demonstrated than impossibility because it does not require a showing that performance is objectively impossible. While an impracticability defense is more commonly used by sellers, in very limited cases it may also be available to buyers.

Section 2-615 of the UCC may excuse performance or delays in performance under three conditions, as interpreted under applicable state law:

• The seller did not assume the risk of the contingency. A court generally considers whether the risk of the occurrence or event was allocated to either party by agreement, practice, or custom.
• The non-occurrence of the contingency was a basic assumption underlying the contract. Under this condition, a seller:
  • with stopped production because the crisis prevents employees from coming to work may argue that having a functioning workforce was a basic assumption underlying the contract; and
  • has a better impracticability argument if it entered into the supply contract before the crisis started, when the parties may not have foreseen a major supply chain disruption caused by the crisis.
• Performance of the contract is commercially impracticable because of the contingency. An increase in the cost of performing is not itself sufficient to justify non-performance. To be eligible for this excuse, the unforeseen contingency must:
  • materially change the inherent nature of a party’s obligations;
  • make performance substantially more difficult, complex, or challenging; and
  • result in the excessive and unreasonable increase in performance costs.

For example, If the seller cannot secure raw materials or supplies due to widespread wildfires that shut down commercial facilities in the supplying region, the crisis more likely qualifies to excuse performance under the UCC.

If the company is the seller that cannot provide or produce goods due to the effects of a crisis, it should consider the following issues:

• Notice requirements. The UCC requires a seller to give seasonable notice to each of its customers. The notice must:
  • state that there is likely to be delay or non-delivery; and
  • include the estimated quota to be made available to the customer when allocation is required.
• Alternative supply sources. If alternative supply sources or expedited delivery options are available to the company:
  • a court may find that the company’s performance was not truly made impracticable by the crisis, even if those options are significantly more expensive;
  • under the laws of most US states, the company needs to use those alternatives to deliver on its contractual obligations, which can be costly;
  • the company should weigh the economic impact of obtaining cover against the expense of defending a breach of contract claim; and
  • the company should consider whether the cost of obtaining cover is unreasonable enough to succeed on an impracticability defense.
• Allocation requirements. If the company’s ability to supply is only partially impacted or if it still has inventory available, it should:
  • carefully check the contract and the governing law regarding whether they contain any restrictions or guidance; and
  • allocate the available inventory among its customers in a fair and reasonable manner. Supplying the company’s priority customers and declaring force majeure to other customers may be problematic.
• Duration of non-performance. The impracticability doctrine only excuses performance for so long as performance remains commercially impracticable.

If the company is the buyer that does not receive goods due to the effects of a crisis:

• It should request information about the nature of the commercial impracticability. This helps the company:
  • plan its activities given the unavailability of the goods;
  • evaluate whether it should contest the seller’s claim of excuse from performance; and
  • determine if it has an obligation to give notice and supply information to its downstream customers.
• It must respond to the seller’s notice of commercial impracticability within 30 days. If the company fails to do so, the contract lapses regarding any deliveries affected. Under the UCC, the company has the option to:
  • terminate the unexecuted portion of the contract;
  • accept a modified contract for allocated deliveries; or
  • challenge the seller’s assertion of commercial impracticability.

Frustration of Purpose

Frustration of purpose is a limited excuse that applies in some jurisdictions when, due to a supervening event, the impacted party’s main purpose for entering the transaction is destroyed or removed. The frustrated purpose is so much the basis of the contract that without it, the transaction makes little sense. Frustration can excuse performance only if:

• The impacted party seeking to be excused can no longer accomplish its purpose for the transaction.
• Both parties knew of the impacted party’s principal purpose for entering into the contract.
• A qualifying supervening event caused the frustration.

As with impracticability and impossibility, the parties’ contractual relationship is materially different because a supervening event has materially altered the inherent meaning behind one party’s performance obligations. However, frustration of purpose is unlike:

• Impossibility. Performance remains possible with frustration, but is excused when one party no longer receives the expected value from its performance.
• Impracticability. Frustration looks at whether the crisis affects a party’s main purpose in entering into the contract, not its performance. The question is not whether a party can perform the contract, but whether its reason to do so still exists.

Courts have confirmed that the circumstances where frustration of purpose can be invoked are narrow. However, an impacted party may be able to successfully invoke a frustration defense in a crisis, for example, where the contract requires performance in a region that is subject to a state-imposed lockdown.

UN Convention on Contracts for the International Sale of Goods

The CISG is an international treaty, ratified by the US in 1986, that sets out the rules governing certain international contracts for the sale of goods and the rights and obligations of the parties. The CISG is similar to Article 2 of the UCC. Parties may expressly waive the applicability of the CISG to their contract.

Article 79 of the CISG sets out when a party can be excused from performance. For Article 79 to apply, supply contracts must meet each of the following criteria:

• The parties to the contract are from different countries that have adopted the CISG.
• The contract is for the sale of goods, such as manufactured goods, raw materials, and commodities. The CISG does not apply to contracts for services only, sales of goods bought for personal use, or sales of ships, aircraft, or electricity.
• A force majeure clause does not replace the CISG (though it can supplement or limit Article 79).
• The contract does not expressly waive the applicability of the CISG.

To excuse performance, Article 79 requires the impacted party to prove:

• The failure was due to an impediment beyond its control.
• It may not reasonably have taken into account the impediment when entering into the contract.
• It may not have avoided or overcome the impediment. Article 79 does not explicitly state whether an impediment excuses performance if partial performance is possible. Case law in different jurisdictions also have not settled whether commercial impracticability can be implied in Article 79.

For example, a supplier may raise this defense if the crisis prevented it from manufacturing and delivering the goods. However, it may be less clear whether a supplier satisfies the third prong that it was unable to overcome this impediment if, for example, the supplier either:

• Was not forced by the government to close its factory, but did so voluntarily.
• Faced a worker shortage because of ill workers, but was able to hire other workers at a higher price.
• Had the ability to subcontract production to a third party in another country at a higher price.

Insurance Coverage

Most companies carry a variety of different insurance policies that may help mitigate financial losses related to supply chain disruptions caused by a crisis. In particular, the company should identify policies that may provide coverage for:

• Slowdowns and stoppages of the company’s business.
• Slowdowns and stoppages of its suppliers’ or customers’ business.
• Liability to third parties claiming the acts of the company or the company’s directors and officers during the crisis caused the third party to suffer bodily damage, property damage, or economic losses.

First-Party Policies

First-party insurance policies obligate insurance companies to pay benefits directly to insureds for losses suffered by insureds to their own interests in property or profits. Potentially applicable policies for crisis-related losses include:

• Business interruption insurance (BI). Most companies maintain property insurance that includes business interruption coverage for losses a company sustains due to a business stoppage or slowdown caused by direct physical loss or damage to the insured property. In a crisis that is:
  • a fire, flood, earthquake, or other disaster that causes property damage, it may be easier to argue that BI coverage applies; or
  • a pandemic or epidemic, BI coverage does not apply if the company’s business experienced a slowdown or closed due to fears of a pandemic even though its property remains habitable. However, BI coverage may apply if the company can show that its property is contaminated and unusable (and therefore suffered a physical loss).
• Contingent BI insurance (CBI). CBI insures against a company’s lost business due to physical loss or damage at the property of its suppliers or customers. CBI coverage may not be available if:
  • the company cannot demonstrate that its claimed business loss was due to actual physical damage (quarantine to contain the spread of virus does not qualify); or
  • the policy limits coverage to direct suppliers or direct customers located in a specified geographic territory.
• Supply chain insurance. This coverage:
  • provides broad coverage against losses resulting from disruptions in a company’s supply chain;
  • is likely to provide coverage for different types of crises (including pandemics), because physical loss at a covered location is not required to trigger coverage; and
  • may be limited to disruptions or delay in the receipt of specified products or services from a named supplier or company.
• BI civil authority coverage. When an order of civil or military authority impairs access to the company’s property and interrupts the company’s business operations, this coverage may apply. However, most civil authority policies:
  • require physical damage to the covered property (not mere fear of contagion); and
  • do not provide coverage for prophylactic measures taken before property damage occurs (even if the order of civil authority is issued before the property damage occurs).
• BI ingress/egress coverage. Ingress/egress extensions cover business interruption losses the company suffers when its property cannot be accessed. Companies seeking ingress/egress coverage:
  • must show their property cannot be accessed due to insured physical loss or damage; and
  • are not covered if their property cannot be accessed due to mere fear of bodily injury (such as due to person-to-person contamination).
• Specialty coverages. The company may have other specialized insurance coverage that covers a crisis, for example:
  • force majeure insurance;
  • political risk insurance;
  • event cancellation insurance; or
  • performance bonds.

After identifying potential coverage, counsel should determine:

• The types of loss that are covered, limited, or excluded if the policy does cover the specific crisis. For example, check if losses suffered as a result of business decisions taken as sensible or precautionary measures align with the circumstances that need to exist for coverage to be triggered.
• When the company must notify the insurer of actual or potential claims. In a crisis, insurers are likely to face an enormous number of crisis-related claims, which gives them a strong incentive to:
  • scrutinize all claims carefully; and
  • require strict compliance with notice provisions and other seemingly minor policy conditions.
• If the company must:
  • take steps to mitigate its loss or damage; and
  • consult with the insurer before taking action.

Third-Party Liability Policies

Third-party insurance policies cover amounts an insured must pay third parties for personal injury or property damage for which the insured is liable. Potentially applicable policies for crisis-related losses include:

• Commercial general liability insurance (CGL). CGL insurance can provide coverage if the company faces a claim that its negligence led to the illness or injury (for example, because of exposure or infection) of clients or customers. This may include, for example:
  • negligence claims made by visitors to the company’s place of business (for example, a claim a customer became ill after visiting an office, retail store, or hotel); and
  • product liability claims (for example, a claim that the company’s air filtration and recirculation system failed, causing exposure or illness).

If the crisis is a pandemic, some CGL policies contain specific exclusions for claims arising from a pandemic or a broadly worded pollution exclusion, either of which may preclude or limit coverage.

• Directors and officers insurance (D&O). D&O insurance can provide coverage if investors, shareholders, or customers sue the company and its officers for failure to protect the business from the effects of a crisis, such as drops in stock price or other adverse financial consequences. Typical D&O polices, however, include exclusions that may apply, including:
  • conduct exclusions that bar coverage for fraud, intentional violations of law, and illegal personal profit; and
  • exclusions barring coverage of claims for bodily injury and personal property.
• Errors and omissions insurance (E&O). E&O insurance can protect the company and its employees against claims that they failed to take appropriate measures to protect third parties from the effects of a crisis (such as direct person-to-person transmission and property contamination in a pandemic).
• Employment practices liability insurance (EPLI). EPLI insurance can help mitigate the risk the company faces from claims by employees that lose their jobs due to government-mandated shutdowns, company shutdowns related to a crisis, or layoffs due to business losses.

Supplier and Customer Relationships

The company has likely devoted time, energy, and expense to building relationships with its suppliers and customers. To protect these relationships, the company should consider the following:

• Long-term strategies. During a crisis, the company should maintain a medium to long-term strategic view when deciding whether to strictly enforce its contract rights. Seeking a longer term commercial resolution to the immediate problems (when possible) may be more beneficial than resorting to legal remedies. It can help the company:
  • avoid disputes or resolve them more effectively; and
  • preserve the company’s reputation and its long-term relationships with suppliers and customers.
• Alternative means to perform contractual obligations. Engage with suppliers and customers in a cooperative and reasonable manner to consider business solutions to legal issues. In doing so, the company should consider the following:
  • contractual counterparties may be willing to adjust performance obligations (such as delaying deliveries to a customer that faces decreased consumer demand), including partial performance or temporary modifications; and
  • care should be taken to ensure that any resolution properly reflects the parties’ agreement and includes any necessary reservation of rights.
• Helping troubled vendors. Distressed suppliers may face operational and financial challenges that threaten their continuing viability. Some suppliers may be experiencing cashflow issues that affect their ability to deliver goods under the agreed terms of the supply contract. Some options to consider include:
  • accelerating payments to the supplier (if only to provide time to transfer production to a new supplier);
  • making a short-term loan to the supplier against which future payments are offset (assuming that the supplier’s existing credit facilities do not prohibit that); and
  • even acquiring a position in the supplier’s existing debt.
• Helping affected customers. Protect customers by considering, for example:
  • waiving penalties for order cancellations;
  • agreeing to a short-term payment plan to help alleviate the customer’s cash flow issues; or
  • offering flexible pricing models.
• Consistent communications. Manage communications with counterparties, bearing in mind the importance of global coordination of local relationships to ensure a consistent approach.

Additional Steps to Protect the Company

The company may need to consider the following issues to minimize risk and protect its business:

• Dispute management. The company should:
  • take all necessary steps to protect the company’s legal and evidentiary position in the event a dispute escalates; and
  • check the contract’s dispute resolution clause to identify which court or tribunal should decide a dispute and how that adjudicator is likely to assess the situation.
• Ways to source products from alternative sources. The company should assess whether it has the equipment, materials, and technology, as well as the right to use (and perhaps sublicense) the supplier’s intellectual property. For example, the company should:
  • have the ability to reclaim any tooling that is in the possession of the supplier so that the company can easily transition the manufacturing of the product; and
  • determine any rights it has to use the supplier’s intellectual property that is needed for production.
• Restructuring or insolvency issues. The supplier may commence or be placed into a formal restructuring or insolvency proceeding. The company should understand:
  • the possible jurisdictions in which this may occur;
  • for each jurisdiction, how its restructuring process may affect the exercise of the company’s rights and add delay; and
  • how the law works in each jurisdiction so the company can develop a strategy for handling that situation.
• The company’s liquidity. A potential supply chain disruption may affect the company’s operations and financial results. The company should have sufficient sources of liquidity to enable it to weather the disruptions to its business.