Supply Chain Challenges – The Whole Picture

7 Questions to 7 Specialists

As you know, supply chains globally have been significantly impacted, with very serious consequences, because of COVID-19. Even as the economy starts to reopen, supply chain issues continue to be top of mind for leaders across many industries as companies navigate new and evolving business norms.

For the whole picture, we asked seven questions to seven leading lawyers at McCarthy Tétrault with expertise on the various areas of supply chain. Here’s what they had to say.

7 on 7

  1. What is the top challenge you've seen from a supply chain perspective in the COVID-19 crisis? What do you see changing as we transition into this next phase?

Martha Harrison, International Trade and Product Regulatory: The biggest challenges are related to the flow of goods – either fully manufactured goods for distribution and sale into the Canadian markets or their inputs that are imported into Canada for use for further manufacture. To manage this challenge, we are assisting clients in a number of ways:

  • Controlling delays at the border with risk-based strategies;
  • Taking stock of domestic and foreign inventory supplies;
  • Finding opportunities to exit non-essential product sourcing through contractual means, and / or finding alternative sources of supply to supplement procurement where
  • foreign manufacturers are operating at a reduced pace, or entirely shut down;
  • Securing relationships in the U.S. and other jurisdictions that may have not been at the forefront previously; and
  • Ensuring clients take advantage of duty remission and / or deferral opportunities at the border to save on immediate costs on imported products.

The big takeaway is the danger in relying on only one source of supply when engaged in goods distribution in Canada. Trade diversification is going to become an essential element of procurement strategies moving forward.

  1. On the labour and employment side, where does our focus need to be as we transition back to the physical workspace and how can we protect our supply chains?

Kate McNeill-Keller, Labour & Employment: The key focus is occupational health and safety and ensuring that all necessary steps are taken to prevent the risk of community spread within the workplace. While every workplace requires a tailored approach, important considerations include:

  • Access points to the workplace;
  • Sanitizing, disinfecting and cleaning the workplace;
  • Dealing with shipping and receiving (g. how will goods be exchanged at the shipping and receiving bay door?);
  • Working with supply chain partners and their COVID-10-related protocols;
  • Restricting who can enter and exit the workplace;
  • Reconfiguring workspaces;
  • Staggering shifts; and
  • Securing supplies of personal protective equipment (“PPE”) and ensuring they are Health Canada compliant.

To the extent that physical distancing is not possible, employers may consider additional measures, such as self monitoring for symptoms, self-reporting, and contact tracing or other technologies. Importantly, there is no one-size-fits-all solution; approaches will depend on the nature of the business. Employers need to determine what is reasonable in the circumstances to meet occupational health and safety obligations.

  1. How is the COVID-19 pandemic affecting how you manage contractual risk with existing and new contracts in the supply chain?

Suzanne Murphy ,Corporate and Commercial: Moving forward, the key takeaway is having a strong contract management system, so that, for example, clients know their material contracts, supply chain contracts, contracts at risk of termination etc. Other ways of managing risk include:

  • Careful drafting of force majeure clauses, material adverse effect clauses and termination clauses;
  • Documenting mitigation and compliance during supply chain disruptions, which is often a precondition to relying on a force majeure clause; and
  • Data protection clauses in contracts and other cyber security strategies in light of the increase in online resource sharing due to COVID-19.

At the end of the day, the most effective strategy for many clients will be to move beyond the four corners of the contract and lean on client relationships to find a mutually acceptable arrangement for navigating this unprecedented situation.

  1. With looming financial challenges facing many companies, how are you advising clients to mitigate their risk of their customers becoming bankrupt?

Heather Meredith, Bankruptcy & Restructuring: In the event that a party in the supply chain becomes insolvent and subject to an insolvency proceeding, one important factor is the stay of proceedings:

  • Stay from Terminating: If a supplier or other contractual counterparty becomes subject to an insolvency proceeding, you may be stayed from terminating contracts as a result of the insolvency filing and stayed from exercising other rights pursuant to the contract.
  • Continued Supply: To the extent you are a supplier to an entity subject to an insolvency filing, you may be compelled to continue to supply (although you can require payment upon delivery unless you are named a “critical supplier”).
  • Contract Review: Carefully review contracts to see what provisions may assist (e.g. a termination provision that allows a supplier to get an early warning or terminate prior to an insolvency filing).

The best approach is to carefully manage supply relationships and seek to be aware of issues and take action prior to an insolvency filing. For instance, by reviewing contracts and considering ‘pre-insolvency filing’ termination provisions, monitoring financial information, and considering alternate supply arrangements to provide greater flexibility. 

If a supplier or customer does or may become insolvent, we regularly work with our clients to consider creative approaches to manage the ongoing relationships in light of the facts in each particular case. We also assist our clients with understanding the governing court orders and/or insolvency provisions to ensure their rights are best protected in insolvency proceedings.

  1. What are you seeing in terms of supply-chain disputes in the COVID-19 era?

Miranda Lam, Litigation: the pandemic has given rise to a number of disputes and issues arising out of supply chain agreements, but parties – particularly where the relationship has been longstanding or because the need to maintain supply is more acute - have been seeking to resolve their differences outside a traditional courtroom or even beyond the dispute resolution mechanisms that are provided for in the agreement. There are ways in which parties can leverage their rights under their agreements during this time:

  • Follow force majeure clauses, if available, strictly;
  • Consider whether certain rights are accelerated or deferred on an event of default;
  • Consider termination rights, if only because their invocation may allow the parties to revise the terms of the contract; and
  • Invoke dispute resolution mechanisms in a timely way, particularly if there are express time and notice requirements.

Beyond your agreements:

  • Consider whether the agreement has been “frustrated” or rendered impossible to perform and potential remedies;
  • Consider whether there is insurance coverage to respond to your circumstances of loss; and
  • For suppliers mandated by governments to provide PPE or other support, look into compensation available in those circumstances.
  1. Have companies sought to collaborate to meet the needs of costumers given the supply chain interruptions during COVID-19? How should people be thinking about common solutions with competitors to serve the market, especially for lifesaving products?

Debbie Salzberger, Antitrust/Competition & Foreign Investment: Just as individuals have been reaching out to their personal networks for support in these uncertain times, our corporate counterparts may be inclined to do the same. However, competitor collaborations in respect of certain activities, such as agreements on the price of products or services, production levels and allocation of customers or markets can raise serious risk, including potential criminal liability, under the Competition Act, R.S.C. 1985, c. C-34.

Here’s what you need to know:

  • Recently, the Competition Bureau indicated it may exercise its enforcement discretion in certain circumstances in light of COVID-19 in recognition of the fact that certain competitor collaborations may be necessary to ensure continued supply of “critical“ goods and services.
  • However, this guidance applies only to very limited industries and circumstances; collaboration must be limited temporally and limited to addressing what is absolutely necessary to address the supply chain challenges during the pandemic.
  • Importantly, any relaxation of enforcement discretion by the Competition Bureau would not shield parties from the possibility of private litigation.
  • As a result, companies need to continue to be mindful of antitrust laws to ensure they are not inadvertently creating a cure that may be worse than the disease.
  1. As organizations prepare to reopen supply chains, which technologies are they deploying to protect health and safety of their employees and workers? What legal issues do you see around the use of that technology?

Christine Ing, Technology: Technology that helps protect the health and safety of employees is just as important as physical distancing in the office. Contact tracing is a main technology being evaluated by many governmental authorities across Canada, but this technology has privacy implications. A key theme we are seeing is that contact tracing technology cannot be mandatory. Employers will have to decide to what extent they will recommend the use of this technology in their workplaces.

Where do we go from here?

As you can see, supply chain challenges are diverse. Business leaders have to take a comprehensive approach to stabilizing their supply chains for long-term success, beyond the impacts of COVID-19.

We can help. Please don’t hesitate to give us a call to discuss your specific concerns.

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