Managing supply chain issues during a pandemic

May 14, 2020

By Manish Narayan

Supply chain at any time has risk exposure at a macro-level, which may, inter alia arise out of disruption in manufacturing, logistics, commodity price fluctuation, exchange rates and geo-political tensions. However, the COVID-19 pandemic has added an unprecedented level of disruption and complexity at the local, regional and global level. United Arab Emirates (“UAE”) is no exception and has been directly impacted upon by the disruption in the supply chain. The effects are being felt both with government entities and private companies. At Galadari, we have seen a significant rise in queries pertaining to renegotiation and/or termination of long-term supply contracts. Further we have received queries pertaining to one-time supply contracts for essential commodities, such as, personal protective equipment and pharmaceuticals for COVID-19 treatment support.

Essential commodities and legal risk management

Pandemic, profit and panic creates an environment where the basic checks and balances vis-à-vis supply contracts may be ignored by businesses, particularly for essential commodities. Based on current advisory work, it is recommended that before entering into an agreement (even for essential commodities), the following steps are followed:

1. Review the details and conduct a regular due diligence of the entity, which is the counterparty in the contract. This is particularly relevant where there are introducers and intermediaries involved in the transaction.
2. A due diligence of the manufacturer is also critical. Although, there will be limitations to the due diligence due to the pandemic, local resources should be used wherever possible. The level of due diligence, which is the minimum threshold for entering into the contract, may differ from a large known brand manufacturer to a small and medium enterprise manufacturing unit.
3. For pharmaceuticals and medical supplies, regulatory compliance is critical. Therefore, it is recommended that all regulatory approvals are procured prior to introducing the product into the market. This is particularly critical as without the requisite approvals from the health authorities the goods may be confiscated by the customs authority.
4. If possible, payments should be made directly to the manufacturer as opposed to intermediaries. Alternatively, security measures should be sought to protect the payments and ensure performance. The security may be way of bank guarantees, post dated cheques, corporate guarantee, personal guarantee and escrow arrangements.
5. From a supply chain perspective, consider alternative suppliers and jurisdictions to minimise the risk of disruption. This may require specific provisions to be built into the contract.

Supply Chain Disruption and Supply Contracts

COVID-19 has disrupted supply chain at almost every level, which includes long term supply contracts in various sectors. The following steps are recommended:

1. Review the contractual provisions which allow for delays and variation and recalibrate the rights and obligations in the context of the same, such as for long term energy supply and construction contracts.
2. Review the impact of the disruption of supply on your business operations. If there are symmetric disruption at both ends of the supply chain, then parties can potentially enter into a standstill agreement suspending the contractual obligations for a specified time period. This may require multiparty negotiations of those who are in the matrix and are impacted by the disruption.
3. Long term supply contracts apart from the contractual provisions also reflect established business relationship between parties. Therefore, it is key to keep the line of communication open and renegotiate terms to incorporate the new economic reality and balance the rights and obligations.
4. The above recommendations are to be assessed in the context of the long-term viability and survival of the counter party. If there are indications that the counter party may go insolvent or may undergo liquidation, then it is essential to initiate legal action at the earliest.

We recommend a thorough legal review of contractual documents between the parties prior to undertaking any actions detailed above, in order to mitigate the legal risks of supply chain issues. Read this briefing in tandem with the firm’s article on force majeure and disruption of the shipping industry.