We know that the Covid-19 outbreak has emptied the streets of bustling mega-cities in China as people stay home but we are now seeing how that is impacting businesses in the UK. The latest news about JCB shortening working hours is just one such example.
The outbreak may be a black swan event but as these events are occurring in greater regularity, how should businesses respond?
Most businesses have taken a very understanding position of allowing for more time to enable suppliers to meet production milestones. That is commendable and should be encouraged.
However, how long should a business put up with this before it has a detrimental impact?
There are a few steps a business can take:
- Review the contract with the supplier to determine whether this is a ‘force majeure’ (a clause specific to unforeseen circumstances) and what options are available. Most force majeure clauses allow for a specific amount of time to pass before an innocent party is allowed to terminate the contract. Knowing the legal construct is important as it allows a business to plan ahead and to take decisive action especially if they have to deliver their products to their customers within a particular timescale.
- If the business is part of a supply chain, speaking to customers to inform them of the risk of deadlines being missed should be a natural progression of the above. And, if possible, agree an extension of time and ensure that this extension is agreed in accordance with the terms of the contract. By doing so, customers are assured and know that this is being looked at. Most customers would probably be understanding and would allow extensions.
This step is also important in identifying potential risks to the business especially if a customer does not agree an extension and is seeking performance of the contract. The business can now put its efforts in minimising that risk.
- The third (and often missed step) is a strategic review of the business’ reliance on a particular supplier or suppliers from a particular country. This is essentially a review of the ability of the business to continue in crises outside its control.
The impact of the current outbreak may appear to be a delay in production but it is also prudent to bear in mind that this may lead to serious financial issues for the supplier as it struggles to keep up with production without financial support.
The reality of a global supply chain is that suppliers from other countries could provide the same products, and it is a case of ensuring that the business knows who these suppliers are and to have the ability to call upon these alternative suppliers at times of need.
The three steps above are fairly obvious and most businesses carry them out to a varying degree of success.
In our view, step three is crucial for the continued success of any business impacted by the current outbreak. Without carrying out the third step, the business will continue in a cycle of damage limitation without solving the underlying issue.
As well as being experienced advisors when it comes to building trade links between the UK and South East Asia, we also have an extensive knowledge of legal aspects on both sides. If you need assistance interpreting supplier agreements or contracts in light of the Coronavirus you can contact us on 07885 784783 or email@example.com.