SHIPPING is already emerging from the sudden shock phase of the coronavirus pandemic, and now has to restructure contractual and supply chain arrangements in readiness for a new post-coronavirus reality.
This will require industry players to not only take practical measures to troubleshoot current issues, but also consider steps to take when the industry reaches the third and final phase of recovery.
This phase will be about mitigating financial exposure, and finding alternative sources of supply and new markets, with the aim of preventing a prolonged crisis impacting your business.
Planning ahead is key, as commercial interests need to be ready to organise, or perhaps reorganise, their supply chains to meet new demands.
We currently find ourselves in a transition between phases one and two, with supply chains still severely interrupted.
Looking ahead — while it may be difficult to imagine today — there will be a stage where restrictions are lifted, customer demand will pick up again, and manufacturing and transport will be available.
Although it is not to be expected that the economy will recover entirely in a perfect V-shape, it is recommended to use the coming period to reflect on how to structure the supply chain in phase three.
The next few months should ideally be used to plan ahead, assess the lessons learnt, and consider three broad areas: dependency on customers and suppliers; the geographic stretch of the supply chain; and re-evaluation of contracts in terms of exclusivity, delivery conditions, duration, cancellation options, excusable non-performance.
On the first issue of dependency, the crisis has shown the vulnerability of the global trade system where, if manufacturing in one country or region stops entirely, finished goods or parts necessary for the assembly of products may not be available, potentially bringing the business to a standstill.
AKD is recommending shipping companies look into potential multiple sources of supply and sale to spread risk, even if abandoning of exclusivity may come at a higher overall cost.
Finally, look again at existing contracts. Do they provide the required flexibility to adapt in times of crisis? Are risks properly allocated, and are the agreed duration and termination possibilities still in line with possible changes that are to be made in the supply chain? Is exclusivity an absolute necessity, and do any other commitments as to volumes, pricing and quality standards still apply?
Also, one could consider reviewing existing agreements with banks and export/credit insurers, in order to have adequate financial backup when it is necessary again in the future.
AKD has set up a taskforce specifically designed to provide swift and answers to questions arising from the uncertainty over by the coronavirus outbreak.
The firm is also urging companies take several practical measures in the current phase two period. Key here is to look at the existing contracts and check: Which obligations do you have? Which of those obligations are at risk of not being performed correctly? What possible contractual excuses do you have in case of your own non-performance? Which contractual remedies do you have in case the other party is not performing?
The obvious short-term advice is to go through your existing contact documentation and make an assessment of risks. This would apply not only to main contracts with your suppliers, customers and logistics service providers, but also to your general terms and conditions and agreements with banks and insurers.
We have seen that most contracts do not have uniform solutions addressing issues of remedies in case of non-performance, early termination rights, payment obligations and force majeure clauses.
The specific text and the underlying intention is central to properly understanding their legal effect.
Common problems include:
Are there any ongoing commitments as to minimum quantities?
What is the effect of the shortages in supply and logistics on just-in-time obligations?
How do various sets of national legislation affect complying with specific Incoterms delivery conditions?
Do today’s circumstances affect the cost price of products or services, and is it possible to forward such extra costs to the customer under the contract?
Do closed borders or export bans on specific goods affect the availability of goods and staff on site where they are contractually required?
Such non-performance of obligations needs to be assessed from a contractual point of view — what is your legal position in case you or you your opposite party defaults — but also from a practical and commercial point of view.
Companies want to keep a commercial relationship which was good and profitable before the coronavirus crisis intact for future purposes, and sometimes accepting late payment is better than enforcing direct and full payment with the risk of putting your debtor into bankruptcy.
