Thinking | 3 June 2020
Supply chain management during the COVID-19 crisis: key considerations
The COVID-19 pandemic continues to significantly disrupt the supply chains in which businesses across Australia, and internationally, operate.
The manner in which a company responds to such disruption will largely depend on their role in their supply chain, and whether they conduct business as a supplier, a customer, or both.
Overwhelmingly, it has been the experience of our clients that the COVID-19 situation has given rise to a need for greater communication between customers and suppliers. Given that it is hoped that a return to normal supply and business will be able to be achieved in a relatively short time period, if there is a willingness between customers and suppliers to be flexible and accommodate delays or adjustments to payment, there is a greater chance that the long-term relationship will be preserved.
Of course, such accommodation is not always possible and customers and suppliers may need to revert to their contractual rights. Set out below is a summary of some key considerations for both suppliers and customers in relation to their contractual arrangements.
Key considerations for suppliers
Suppliers of goods and services should have regard to the following:
- Communication with customers: As noted above, during this period, it is very important that a supplier maintains good lines of communications with its customers so that they are able to work together to achieve an outcome that is for the benefit of both the supplier and customer and ensures, as much as possible, that the businesses are able to continue to operate.
Having said this, it is important that a supplier preserves contractual rights and remedies, and does not inadvertently waive its rights or make representations that could give rise to arguments of estoppel. Accurate and complete records of communication will assist a supplier to preserve its contractual rights.
- Contracts with customers: A supplier should review each of its contracts with its customers to understand its obligations and rights. In particular, a supplier should consider the following:
- Whether its contracts allow it to unilaterally vary pricing and delivery timeframes, or otherwise provide a process for the parties to agree to vary such items. If contracts allow for this, a supplier should make sure that the process set out in the contract is followed.
If considering a variation to pricing or other delivery criteria, it is important that a supplier acts transparently and provides accurate and complete explanations to its customers as to the reason for the variation. A failure to do so could give rise to a breach of the Australian Consumer Law or the Competition and Consumer Act 2010 (Cth) for misleading or deceptive conduct.
- What, if any, indemnities the supplier may have given in its contracts in favour of its customers, and whether one or more of the customers may rely on such indemnities in the circumstances.
As part of this review, a supplier should review its contracts to see what limitation of liability protections may be in place for it in the relevant document.
- Whether the supplier is able to rely on any force majeure clauses in the contract for the purpose of being able to delay supply or change pricing without triggering a breach of contract. Force majeure clauses allow a party to be relieved from performance under a contract where certain, unforeseen events outside of that party’s control prevent that party from being able to perform its obligations. Further discussion regarding the enforcement of force majeure provisions can be found in our previous article.
- While a supplier should consider all other options before resorting to termination, a supplier should be aware of its termination rights under its contracts so that it is able to plan properly and avoid any arguments of wrongful termination or repudiation.
- Business interruption insurance: A supplier should review its insurance policies to determine whether it is able to make a claim for losses arising from the COVID-19 pandemic. A supplier should also check insurance policies to see what protection is offered to manage claims from customers or third parties arising from an inability to supply, or delay in supplying, products and services to a customer.
- Security and other protections: A supplier should consider what security arrangements they have in place to ensure payment or, at a minimum, ensure recovery of goods in the event that payment is not made by a customer or the customer experiences a solvency issue. If a supplier supplies products to a customer on a consignment or retention of title basis, it should check that all appropriate PPS registrations have been made in respect of the relevant customer.
- Australian Consumer Law: A supplier should be wary of its obligations under the Australian Consumer Law. Specifically, a supplier should avoid:
- misleading customers in relation to their rights under the contract and performance of the contract;
- relying on provisions that may be deemed to be ‘unfair terms’ in its contracts; and
- acting unconscionably when dealing with its customers.
Key considerations for customers
Customers should have regard to the following:
- Communication with suppliers: A customer should engage with suppliers proactively to understand whether they will be in a position to satisfy their obligations under their contracts. The earlier that a customer can identify potential delays or shortfalls in supply, the more time the customer will have to source alternative suppliers. However, it is important that a customer preserves contractual rights and remedies, and does not inadvertently waive its rights or make representations that could give rise to arguments of estoppel. Accurate and complete records of communication will assist a customer to preserve its contractual rights.
- Contracts with suppliers: A customer should review its contracts with its suppliers to better understand its rights and obligations under such contracts. In particular, a customer should consider the following:
- Whether its suppliers have any rights under the contract that allow them to unilaterally amend the price of goods or services or delivery timeframes.
- Whether there are any exclusivity provisions in the contract that would prevent it from engaging an alternative supplier.
A customer should also consider whether the customer is required by the contract to purchase a minimum amount of goods or services from a particular supplier.
In either case, an assessment should be made as to whether such provisions apply in the current circumstances, particularly where a supplier is unable to satisfy an order or has unilaterally increased the price of a product.
- Whether there are any provisions in the contract that allow it to cancel or suspend orders. This may be particularly useful in circumstances where the customer expects to require reduced goods or services from a supplier.
Conversely, a customer should consider whether suppliers may have grounds under a contract to suspend or vary orders or rely on force majeure provisions.
- A customer should consider whether it has any rights against suppliers in its contracts that would allow for recourse where the customer suffers loss under another contract (for instance, a contract with one of its own customers). In particular, the scope of indemnities (if any) should be considered.
- Termination rights: While, ideally, termination will be a last resort for a customer, the customer should consider whether it has a right to terminate a contract if the relevant supplier is in breach of that contract. Prior to exercising the right to terminate a contract, a customer should ensure that it obtains legal advice to ensure that the supplier is not able to bring a wrongful termination or repudiation claim against it.
While there may be a valid right to terminate, a customer should consider whether there are other suppliers in the market that would be able to supply the relevant goods or services to the customer at a reasonable price and within a reasonable timeframe. The termination of an agreement may not be particularly useful where there is limited supply in the market.
Given the uncertainty in the market, customers and suppliers should be frequently re-evaluating their contractual rights and obligations to ensure that they are best placed to continue to operate and to avoid disputes.
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