Buyers should attach more weight to suppliers' robustness

posted by Mark Stefanini, Miles Robinson and Jonathan Cohen
11 November 2020

Extreme events can test the robustness of supply chains and the Covid-19 pandemic is no different.

In the wake of the latest lockdown measures, which are currently being enforced across the UK, businesses, and the supply chains on which they rely, are once again facing the challenges that many experienced during the first half of 2020. 

A fundamental difference between the spring and autumn lockdowns is, of course, that businesses have now had an opportunity to prepare for potential further disruption. This should (in theory at least) mean that they are far better placed to understand the consequences for their business of a coronavirus outbreak and what can be done to mitigate against the effects of it.

Contractually, we expect that force majeure provisions will be the subject of more significant focus in any negotiations. These clauses (which pre-pandemic were mainly thought of as “boilerplate”) are now considered to be essential contractual provisions. Parties therefore need to understand how their force majeure provisions operate and (importantly) how risk is allocated with regard specifically to potential Covid-19 scenarios.

In particular, if a force majeure provision is intended to suspend performance of some (or all) obligations by one (or both) parties, consideration will need to be given to the steps that need to be taken in order for the provision to be engaged and to understand the practical implications of engaging the provision.

From a procurement perspective, although a supplier offering an aggressive pricing structure and/or implementation period may be attractive in “good times”, the present pandemic is likely to stress-test the viability of such commercial terms to their limit.

There is therefore an increasing focus on the importance of conducting thorough due diligence on supply chain partners to ensure that they have robust processes in place to be able to withstand events (such as further lockdown measures) which may impact upon the availability of goods, services and workforce. Furthermore, parties may increasingly favour multi-source arrangements, rather than exclusive arrangements so that they are not wholly reliant on any one particular partner.

Where the supply chain requires a high degree of collaboration and interaction between parties (which is common in, for example, technology contracts), consideration will need to be given to how that collaboration can continue against the backdrop of further economic and social disruption.

These types of contracts also tend to have more complex governance and dispute resolution provisions which may assist in dealing with disputes arising from the unusual circumstances of the pandemic. Parties to these contracts should continue to follow all governance and dispute resolution processes, and escalate any issues which arise to appropriate levels of management, in accordance with the contractual terms.

Overall, those responsible for valuing or otherwise assessing the offering of a potential supplier would be well advised to attach greater weight to factors which point to robustness and flexibility on the part of that supplier than might have been the case pre-pandemic.

☛  Mark Stefanini and Miles Robinson are partners and Jonathan Cohen is senior associate at law firm Mayer Brown

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