International Trade and Disruption of Supply Chains: Risk Management in the Pandemic Age
March 17, 2020
By Brett W. Johnson
In 2008 and 2009, we presented on the impact of the swine flu and efforts that companies should take in the time of a pandemic related to global supply chains. The guidance we provided over 10 years ago is timely once again. In our January 2008 article on this topic,1 we forewarned about the potential impact of a pandemic on business operations and reviewed the Centers for Disease Control and Prevention (“CDC”) “pandemic severity index,” which ranks flu outbreaks in terms of expected deaths. In announcing the new index in 2007, the CDC director stated, “pandemic influenza is not necessarily imminent, but we believe it is inevitable. And it’s not a question of if, it’s a question of when, so we do have to prepare.”2 Now is the time to continue to prepare and respond to legal impacts related to the COVID-19 pandemic.
In the current environment, U.S. companies face substantial exposure throughout their supply chains. As an example, multiple countries have responded to an outbreak by, among other things, closing schools, cancelling church services and other public gatherings, closing borders, and cancelling travel opportunities. The pandemic impact on business operations is quite noticeable and will have long-term impacts on global trade. As with the World Health Organization ("WHO"), the U.S. federal government and local governments are quickly developing responses to pandemic scenarios, and companies should continue to promptly review their own emergency plans to ensure continuity of operations.
A sales force scattered across the world and far from home poses one of many complex challenges. A global supply chain and overseas service outsourcing centers are other potential challenges to consider that could severely disrupt travel, trade, and tourism if nations were to tighten border controls. The CDC and trade organizations have issued useful guidance to businesses on how to prepare and respond to an increased swine flu outbreak. A company should evaluate this guidance as it relates to impact on supply chains. A company will be in a better situation in a future legal dispute with vendors and customers by pointing to compliance with government guidance and, most importantly, declarations and regulations.
Companies should also review their policies and procedures to ensure that individualized contingencies are established. Even companies that developed response plans should review the procedures in light of the current government guidance. A few issues to consider include:
- Company Planning. The company’s specific role, responsibility, and obligation as the pandemic continues and the impact that local, state, and federal laws may have on any corporate response. Companies that have dedicated the resources in advance and have planned appropriately will be in the best position to address the pandemic or other secondary crises. However, company partners throughout the supply chain likely are not prepared to address the issues. This is especially the case due to the “just in time” environment related to supply chain management. Thus, to mitigate issues going forward, companies should evaluate alternative vendors to meet demand. But, separately, companies need to understand their competitors’ position and abilities. Simply, if a company is not able to meet a contract requirement, they also need to mitigate by providing alternatives or showing that no alternatives are viable.
- Company Communication. As shown through the multiple emails received from companies, initial communication appears not be an issue with regard to consumers. However, companies need to have communication with the entire supply chain and set reasonable contract performance expectations. The set-up of a dedicated planning committee with senior management to address this emergency scenario is vital to ensure that correct and timely communication is provided to all stakeholders. A planning committee can address human resources, insurance, communication, security, and continuity of operations concerns during a crisis period.
- Company Resources. The resources (manpower and technology) necessary to support the policies and procedures should be maintained. There may be a rush to minimize operations, furlough employees, or otherwise curtail operations. However, a company should evaluate both the short-term and long-term impacts on itself, its supply chain, and customer needs. If a company is able to perform a contractual obligation, it should be prepared to perform.
A review of existing policies and procedures should also involve an evaluation of the specific and unique legal issues that companies will face to prevent overwhelming the legal department during an emergency, including:
- Quarantine orders directed toward facilities or individuals. This is especially critical with global sales forces. A company must be prepared if a foreign government decides to quarantine the company’s U.S. employees who are travelling abroad. This was a serious issue facing many companies, especially those companies with employees travelling to Asia and Europe. Employees should be provided contact information for the U.S. Embassy or local consulates. If the U.S. does not have a strong presence in the foreign country, the employee should have the contact information for a “friendly” embassy, for example Canada or Great Britain. In many emergencies abroad, western countries collaborate to help each other's citizens.
- The government’s commandeering of corporate assets in a crisis. Although many Americans believe this could never happen, governments would not hesitate to utilize their “takings powers” to respond to an emergency. This type of action is specifically authorized by the U.S. and state constitutions. In the U.S., such takings are typically compensated. Companies operating in foreign countries should take this issue seriously to minimize potential losses and disruptions to affected supply chains. No matter where the taking occurs, the company must instruct its employees to document specifically (1) which agency is taking the asset, (2) what individual within the agency is responsible for the taking, (3) the legal authorization cited by this individual for the taking, (4) what specific assets the government is taking, and (5) when the asset was taken. By having clear documentation, the company will be in a better position to make a claim against the government for the taking.
- Workers compensation and other insurance related issues. It is important to review the various insurance policies and worker compensation obligations to ensure that the company takes every necessary action to maintain its coverage. For example, many companies use “staffing agencies” in foreign countries to handle operations. However, just because the company does not consider the workforce as “employees,” the country law may have a different perspective. Therefore, it is not just to review the contract terms as to such staffing arrangements, but also have an understanding of the countries’ law. It would be unfortunate if a company believed it was cutting costs through termination of a staffing company contract, only to learn very quickly that the costs would actually double based on compliance with the foreign countries’ laws.
- Coordination with government officials. It is important for the company to understand how to work with local, federal, and foreign governments to address a wide range of issues that may develop during a true emergency. The company should appoint a point person and contact the local (usually county) and state government health organizations to identify who to call for information about the various issues.
- Continue to comply with other company policies. In a crisis, there is at times the perspective of getting the job done, regardless of the costs. However, company agents (employees and third-party agents) should reiterate that company policies are still in effect. Specifically, companies must take effort to ensure that government agents are not bribed to gain an unfair business advantage. Although understanding competitor positions is key in a crisis (and may be necessary for mitigation as referenced above), companies should ensure that price fixing, violations of the Procurement Integrity Act or False Claims Act, or other anti-competitive actions are not taken. If a company is a part of C-TPAT or other supply chain security arrangements with a government agency, ensuring that those protocols (and any breach reporting) occurs. Further, documentation should remain accurate and maintained.
- Dispute resolution analysis. Many companies fail to identify an “exit strategy” when moving supply chains or markets globally. Dispute resolution is not just reviewing the termination or choice of law provisions in a contract. Instead, companies should understand the entire contract to determine other important provisions, including delivery (INCOTERMS 2010, Uniform Commerce Code, etc.), pricing, taxation, and mandated notice requirements. Although a company may have a required “cure period” before terminating a contract (or issuing a stop work order), it may have an anticipatory breach claim that will allow further mitigation. But, if demand letters and litigation (including injunctions) are inevitable, ensuring proper forum and choice of law is still key. However, companies should remain flexible and open to alternative dispute processes that can be agreed upon between the parties. For example, if there is an arbitration clause and the identified arbitrator is not able to meet the timing demands, agree to utilize the local courts. Or, as local courts appear to also be significantly impacted, agree to arbitration or expedited mediation.
Continuity of operations will be critical. Ongoing planning can alleviate or at least mitigate potentially devastating financial and legal consequences. It is not too late for companies to review their policies and procedures in an effort to anticipate all types of emergencies and establish a plan that will ensure continuity of operations. Flexibility, while maintaining legal defenses, will be the key to ensuring a strong global supply chain.
- Johnson, B. and Shuman, S. (2008), New CDC Warnings Prompt Global Businesses to Review Emergency Policies and Procedures, Author, Global Connection available at http://www.swlaw.com/files/Publication/7156fccc-2af9-49bd-9837-00c0a18c98a3/Presentation/PublicationAttachment/5bce7522-1b13-4831-9405-040aa05cad44/GC_Jan08_Electronic.pdf
- See Tony Pugh, CDC Develops System to Gauge Severity of Pandemic, MCCLATCHY-TRIBUNE INFORMATION SERVICES, February 1, 2007, available at http://www.mcclatchydc.com/staff/tony_pugh/story/15517.html.
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