Management of procurement and purchasing has become increasingly strategic for companies in recent years due in large part to developments in technology and traceability. The COVID-19 pandemic has brought a new level of complexity to these issues, however, as supply chain disruptions have created significant operational challenges for global organizations. Companies with geographically-dispersed and multi-tiered supply chains are among the most affected by the current outbreak, facing issues relating to payment or delivery failures, price gouging, supplier solvency and potential disputes.

These operational challenges are taking place against the backdrop of sharp swings in commodity prices as well as evolving policies on international trade and tariffs. Moreover, increased shareholder activism on environmental, health and safety (ESG) issues, as well as calls to place sustainability considerations at the heart of the COVID-19 recovery, have introduced more uncertainty into the global business model that many multinationals had previously adopted.

This memorandum presents certain legal and compliance considerations with respect to supply chains that multinationals may be facing at the moment, including with respect to day-to-day operations, corporate governance and liability management as well as an overview of the evolving legal and regulatory framework applicable to supply chain due diligence.

I. Managing COVID-19 Legal and Compliance Risks for Supply Chains

In the wake of the COVID-19 outbreak, the following considerations may be relevant to managing supply chain risk from a legal and compliance perspective.

  • Supplier Default. Some larger manufacturers may be negatively affected by disruptions to their supply chains, whether relating to unavailability of raw materials, logistics or personnel. Moreover, due to the economic climate, suppliers may be unable to deliver (or obtain delivery and/or payment from sub-suppliers).
  • One strategy for suppliers and purchasers alike in the current climate is to compare terms of material contracts to see where there may be room to defer delivery or payment, or otherwise renegotiate terms. Key terms include (i) whether a force majeure, hardship or material adverse change / material adverse effect clause can be invoked;1 (ii) whether defenses are available under applicable law (i.e., doctrines of frustration, distress or impossibility of performance); (iii) what requirements may exist for effective notice to delay performance or payment (and any notice periods for service of process in the context of a dispute); (iv) what constitutes an event of default; and (v) what remedies or cure periods may be invoked.
  • Once these terms have been reviewed and compared, companies will have a better sense of the strategy for approaching contract termination or renegotiation, as well as any possibility to delay performance or payment or adjust volumes or prices.
  • Price-Gouging. The pandemic is leading to extreme demand and price volatility for certain products, such as personal protective equipment and cleaning supplies, as well as fluctuations in firms' costs. As firms struggle to manage these changes, government agencies are aggressively seeking to show they are preventing consumer exploitation—for example, as a result of "excessive" prices—during the crisis. Governments are already investigating based on a variety of different instruments, including competition rules, consumer protection laws, and "price gouging" prohibitions. Commissioner Vestager, for example, has stated that the EU Commission "will stay even more vigilant than in normal times if there is a risk of virusprofiteering."
  • In the United States, where there is no federal price gouging prohibition, all 50 states and the District of Columbia have their own laws against certain price increases (many by way of a declaration of a state of emergency) and numerous state attorneys general have announced investigations into alleged unlawful pricing.
  • The White House, the Federal Trade Commission (FTC), and the Department of Justice (DOJ) have also made announcements about potential price gouging concerns. Based on agencies' statements and action to date, the focus is currently on protective equipment and medical supplies deemed essential to consumer health (broadly consistent with the pre-crisis focus on excessive pricing for pharmaceutical products with inelastic demand), but this could expand as conditions evolve.
  • — Firms in sectors under pressure due to the pandemic should be alert to the risk of agency interest in their pricing policies, particularly significant changes to pre-crisis prices in response to increased demand for particular goods or sudden changes in their costs.2

Footnotes

1 See Cleary Gottlieb, Coronavirus – Force Majeure or Frustration? (February 20, 2020), available here. For a full discussion of these considerations, see Cleary Gottlieb M&A and Corporate Governance Watch, Return of the MAC? – Protecting Buyers During a Pandemic (March 30, 2020), available here.

2 See Cleary Gottlieb, "Exploitative" Abuse of Dominance and "Price Gouging" in Times of Crisis (March 31, 2020), available here.

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Originally published 15 July, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.