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Legal Risks in Global Supply Logistics (I)

COVID-19: an opportunity to rethink your supply chain

The coronavirus pandemic encouraged governments to pay more attention to the implications of sourcing products of critical social or economic importance cross-jurisdictionally, and companies should also use this moment as an opportunity to re-evaluate their supply chains.

The coronavirus pandemic has revealed that some supply chains only involve a limited number of suppliers, often from the same region, resulting in the inability to hedge certain legal risks in global supply logistics. For example, in France 80% of the raw materials for active agents in some drugs are sourced from China or Asia.[1] In the computer chip industry, “[i]n the United States, chipmakers are considered essential businesses and allowed to operate. But with no uniform global definition of ‘essential,’ industry executives say their delicate supply chains have hit snags as lockdowns played out differently in different countries, with Malaysia and the Philippines both shuttering or reducing work at factories…[while in Singapore, e]arlier lockdown confusion affected makers of all sorts of chips, from memory that goes into laptops and internet servers to specialty chips destined for ventilator manufacturers scrambling to combat the coronavirus pandemic.”[2] In this article, we will discuss certain common legal risks associated with global supply logistics which are highlighted by COVID-19.

Contract risk

The failure of just one business partner to fulfill the terms it has contracted could have a devastating effect on an entire supply chain. Under the impact of the pandemic, contracts have been at risk of being breached because cross-border trades have been deferred or cancelled due to lockdown measures and restrictions on cargo ships and airplanes. The high demand for personal protective equipment has also increased the potential for contract risks in supply chains.

There has been disruption to countless supply contracts due to factory shutdowns in the areas most affected by the pandemic, especially in China. Reportedly, the China Council for the Promotion of International Trade has issued thousands of force majeure certificates to allow local exporters to avoid complying with contracts signed with overseas business partners. Organizations in Singapore and Hong Kong have also been attempting to rely on force majeure provisions for failure to hold up to contractual terms due to the pandemic. It is important to note that force majeure is not a common law concept, and according to an article published on Hong Kong Lawyer, “the full effect and applicability of a force majeure clause hinges upon its precise language.”[3] Therefore, companies should review their supply contracts and be alert when signing new agreements.

The high demand for personal protective equipment has also revealed contract risks in supply chains. For example, in Hong Kong, shop owners have been found to be selling poor quality masks with dangerous bacterial count, which could pose a risk to the health of some wearers. Although the ultimate retail sellers might not have been aware of the defectiveness of the masks, they are faced with reputational damage, loss of income, the hassle of having to recall deficient products and costs associated with looking for new supplies. Most importantly, they could be facing huge penalties and/or imprisonment due to the fault of their suppliers providing items that do not fulfill the agreed requirements, breaching contractual agreements.

The disruption created by the pandemic provides a valuable opportunity for companies to reflect on the existing supply contracts and a valuable lesson for the drafting of future contracts.

Bribery and corruption risk

Corruption thrives in times of economic difficulties. The disruptions caused by COVID-19 have created dramatic financial impacts to organizations and firms. Demanding business targets and strategic goals and the fear of job loss may drive certain people to consider engaging in bribes to secure business opportunities or for personal economic gain. Although bribery may only be happening at one stage of a supply chain, it may also affect the other parties involved.

During the last few months, a former medical representative (“MR”) of a pharmaceutical manufacturer and a pharmacy operator (“PO”) were convicted of bribery in relation to the supply of pharmaceutical drugs. The pharmacy was a client of the manufacturer, which maintained two price lists for each drug, one with lower prices for registered doctors, and another for pharmacies. In return for HK$1 million, MR conspired with a clinic to falsely represent to the manufacturer and its distributor that the clinic had ordered various drugs when it was actually the pharmacy. As a result, the manufacturer and its distributor supplied those drugs at the lower prices.[4]

Under the impact of the COVID-19, workers are fearful of job uncertainty and companies have a financial incentive to get back on their feet as quickly as possible. Extra caution should be taken as there can be huge consequences personally for persons found guilty of bribery as well as their companies and counterparties in their supply chains.  These consequences include incarceration, large fines, or having to pay such sums as part of settlements, not to mention the potential to be banned from tendering for public contracts and the severe damage to their reputation.

As the court in Director of the Serious Fraud Office v Airbus SE[5]said, “[w]hat matters here is not the potential loss of contracts per se, but the effect [debarment from tendering for public sector contracts caused by a bribery conviction] will have on the company financially...and the wider effects this will have on innocent third parties...Secondly, there are obvious associated risks to debarment...including to the financial position of Airbus...and to the internal health of the company caused by the loss of key revenue streams and the loss of market presence...These would inevitably affect Airbus'...share price, and...the thousands of companies and jobs which rely on Airbus, as part of its supply chain.”

[1] https://www.reuters.com/article/china-health-france/update-1-france-urges-business-to-rethink-supply-chains-as-coronavirus-hits-asia-idUSL8N2AL3KZ

[2] https://www.reuters.com/article/us-health-coronavirus-semiconductors-foc/with-singapore-lockdown-underway-essential-chipmakers-count-on-less-disruption-idUSKBN21Q042

[3] http://www.hk-lawyer.org/content/covid-19-and-operation-force-majeure-hong-kong

[4] https://www.icac.org.hk/en/press/index_id_865.html

[5] [2020] Lexis Citation 56