COVID-19 Forces You to Deal with Adverse Impact on Your Supply Chain

Webinar Summary
IFA Members from Polsinelli and the Spice & Tea Exchange discussed the implications of COVID-19 on the global supply chain, provided an update on imports, exports, and trade into and out of the United States, and briefed participants on insurance provisions related to the pandemic. The panelists went into detail on supply chain interruptions and possible avenues for relief via domestic secondary vendors. While the panelists noted trade and import/export reductions, they noted that the U.S. Trade Representative has published new tariff exclusions on certain important goods. Finally, the panelists discussed business insurance coverage.

Below are key bullet points from the webinar –

• There are a variety of ways and contract provisions that help to cope with supply chain interruptions, including: finding different varieties of products domestically; alternative supply availability or cover; exclusivity requirements; purchase order acceptance/confirmation/rejection
• Consult your contracts to determine what options are available to you if your supply chain is affected
• Consult your contract to see what is covered under Force Majeure provision. Some Force Majeure contract clauses cover pandemic/epidemic, some do not; courts in the United State interpret Force Majeure narrowly and strictly
• Consider brand/menu alterations to adjust for supply chain issues, while maintaining consistent customer experience

Full Bullets –

Covered topics:

1. Supply chain
2. Import/Export
3. Insurance

• Spice & Tea Exchange supply chain issues
  • Experiencing problems after the Chinese New Year – factory closures
  • Finding different varieties of products domestically
  • Effects on crops further out for spice and tea industry
  • Distribution centers in California closed down; shipments held
• Suppliers accepting purchase orders / variations in performance of orders
  • Sent letter to vendors, rejecting all orders at the dock and extending payment terms
• Dealing with brands with issues in supply chain/getting alternative supply/refusing delivery

Provisions/agreements –

• • Sometimes Force Majeure only goes one way – pay attention to who is party to the clause
  • Exclusivity requirements/minimum purchase or sale requirements
  • Purchase order acceptance, confirmation, and rejection
    • Look at these processes: you might need to stop, not accept purchase orders, and a remedy to reject accepted orders
  • Finished product provision
    • Refusal to ship and non-payment
  • Alternative supply availability and/or cover
    • Buyer can seek reasonable alternatives if the substitute cannot be supplied by the seller
  • Damages
    • Delay of delivery of product
    • Damage wavers, where only direct damages are involved
  • Difference between suspension and termination of obligations under your supply agreement

Force Majeure –

• Act or occurrence outside or beyond the control of the parties
• Force majeure is controlled by language in the contract and by law
• International laws and country laws that may apply in supply chain force majeure
• Generally speaking, these clauses are construed narrowly and strictly
  • Natural disasters, riots, strikes, wars, Act of God, government intervention
  • Catchall: not within parties control or outside of negligence and conduct
• Exclusion of financial inability to pay
• What does it relieve? Relieves or suspends performance; permits a party to terminate the contract in question
• Event or risk of non-performance was unforeseeable and outside of control
  • Foreseeability comes up in catchall provisions
• Does the current outbreak qualify as a Force Majeure?
  • What is listed in your contract – some list a pandemic/epidemic
  • Colorado defined disaster tied to epidemic
  • Government action portion of clause
• Can you imply FM clause into your contract?
  • Some countries’ law can implies a Force Majeure clause

Brands and Operators adjustments as a result of supply chain disruptions –

• Changes to menu/products
• Changes to methods and standards
  • Shifting in-store experience to contactless
  • Distribution center sanitation
• Maintaining brand standards/brand identity
• Maintaining quality
• Maintaining propriety specs
• Changes to distribution channels
• Marketing/messaging the above
  • Social media, web sales, online orders
• No change in vendors, but a backup in vendors so that stores don’t see an interruption in service

Reopening Considerations

• Tapping into goodwill with existing customers
• Using the company’s products in Instagram/social posts to boost the human element
• Remedies in supply contracts will discuss temporary cessation or change
  • Cover from other suppliers may be possible, until the event is over and resumption with original supplier

Trade, Import/Export

• Prior to Europe/US lockdowns, there were major reductions in import/export and port trade
• 45% reduction in imports from China
• Customs has seen a 54% reduction in traffic from US ports
• Exports are also in a steady decline and will further decrease
• Some good news on customs side – they remain open in the US and remain working
• Non-essential travel from Canada and Mexico, but customs is exempting lawful cross-border trade
  • Customs policy is to try to keep trade flowing
  • Delayed payment of customs, duties, and fees no longer accepted
  • Possible 90 day deferral of tariffs being considered by the Administration
• US Trade representative has published new exclusions on certain imported goods
• Federal Register notice requesting comments from industry on possible further modifications to remove section 301 duties on Chinese products; USTR is welcoming input on this

Insurance

• Business interruption coverage contained in property policy
• Suspension of operations
• Whether Covid-19 causes “physical damage” – can render the facility unusable or uninhabitable
• Covers causes of loss
  • Consult your policy to see what coverage you have
  • Some have specific inclusions for viral contamination/pollution
  • Some other policies exclude viral outbreaks, but include bacterial outbreak
• Working remotely, or partial service may not be loss of service
• Other special coverages –
  • Civil authority coverage – does not require physical damage, based on interruption of insured business
  • Contingent business interruption coverage
    • When other vendors in party’s supply chain undergo damage
  • Supply chain coverage
    • Broader
  • Ingress/Egress coverage