About the author

Dan is a commercial lawyer representing fast-growth and enterprise clients in the software and financial technology sectors and the automotive and advanced manufacturing industries on their commercial negotiations, corporate transactions and regulatory obligations.

Dan is also our managing partner and oversees our enterprising client technology partnerships. He is committed to delivering faster, more accurate and better value legal services to all our clients.

This post is an extract from our comprehensive white paper, “Supply Chain Risk Mitigation Strategies: 12 critical legal considerations for managing and mitigating risk up and down the supply chain”, which is available as a free PDF download here.

The automotive and manufacturing industries are in many ways defined by supply chains. In recent years, as a result first of the pandemic and then its aftermath, supply chains have come under significant pressure worldwide.

This note sets out some critical risk mitigation strategies relating to the management of business continuity and disaster recovery (BCDR), force majeure and systemic risk management for the benefit of our clients operating within stressed and sometimes confrontational supply chains.

One of the most keenly learned lessons of the COVID pandemic was how resilient supply chains are (or are not) to what are typically described as ‘acts of God’ (natural disasters, epidemics etc) and other catastrophic events such as large fires, explosions and terrorism.

Preparation for, and protection against, natural and other significant disasters, however, is both a practical exercise as much as it is a legal exercise.

Business continuity & disaster recovery (BCDR)

Most supply chain participants have some form of BCDR planning in place. Organisations are encouraged to go through intensive scenario brainstorming and related contingency planning on a regular basis. Time and resources spent on developing detailed risk analysis and contingencies for significant events can pay enormous dividends where the unthinkable eventually occurs.

Organisations are well advised, however, to ensure that any practical arrangements for disastrous circumstances are mirrored along their supply chains and that those plans dovetail with their own BCDR plans (or at least are not incompatible).

Further, organisations are well advised to ensure that their suppliers (and also their customers) regularly tested their respective BCDR plans, ideally in conjunction with other supply chain partners.

We recommend that organisations include commitments to cooperate on BCDR plans with other partners along the supply chain in all of their critical agreements with supply chain partners.

BCDR plans are just one of a number of contractual and non-contractual elements that interact with one another in the context of significant events affecting supply chains, all of which should be mirrored ‘back-to-back’ (to the extent possible) with both suppliers upstream and customers downstream.

Force majeure

The most obvious contractual provision relating to significant events is the definition (and consequences) of ‘force majeure’ events – catastrophic circumstances beyond the control of the parties – which typically provide a ‘get out of jail free card’ for suppliers.

Under typical force majeure clauses, in the instance of a catastrophic event, which is deemed to be a force majeure event (normally as defined in the relevant agreement), suppliers will have a moratorium period during which no liability is incurred for breaches caused by such force majeure event and, following such moratorium, if the supplier is still not able to get up and running, the contract will typically terminate automatically with no (or limited) liability to the supplier.

It is therefore critically important that force majeure clauses are carefully aligned along supply chains and that what constitutes a force majeure event is carefully controlled.

Where an organisation’s upstream supplier is off the hook as a result of force majeure, but the same circumstance does not trigger force majeure forgiveness downstream (with that organisation’s customer), the relevant organisation can be left shouldering all the risk, as countless supply chain participants found during the COVID pandemic.

Where a significant adverse event occurs that does not qualify as a force majeure event (such as industrial action, for example), suppliers typically remain on the hook for the continuing supply of goods or services under contract and, whether an incident qualifies as a force majeure event or not, BCDR plans should kick into place to ensure that supply can continue, to the extent possible.

Unilateral variation clauses

Unilateral variation clauses are a further example of a contractual provision to protect suppliers in adverse scenarios, empowering suppliers, for example, to increase their prices or reduce supply volumes where faced with significant increases in the price of raw materials or the availability of affordable insurance cover, which may significantly affect profit margins.

At some point in the supply chain, it may not be possible for variation clauses to be passed on, at which point the relevant participant will be left in an awkward position and certain hedging or insurance solutions may be the best alternatives.

Bringing it together

Where supply chain participants align BCDR plans and force majeure provisions, both upstream and downstream, and understand their exposure to unilateral variations clauses, they have made a good start in ensuring that, where adverse events occur, the lines of legal responsibility are carefully drawn and mitigated.

When disaster strikes, or dynamics shift unexpectedly, it is too late to make risk-mitigating changes, as so many supply chain participants have learned in recent times.

At Clearlake, we have significant experience both analysing the risks businesses face with their existing supply chain arrangements and implementing legal risk mitigation strategies, in collaboration with departments in our clients’ organisations and with their contractual partners, to ensure holistic strategies are developed.

This post is an extract from our comprehensive white paper, “Supply Chain Risk Mitigation Strategies: 12 critical legal considerations for managing and mitigating risk up and down the supply chain”, which is available as a free PDF download here.

About Clearlake

At Clearlake, our commitment is to provide such a great combination of quality and value that we give our clients a competitive advantage when entering into commercial arrangements with their customers and suppliers.

Please feel free to reach out directly to Dan Stanton on dan.stanton@clearlake.law or 0204 570 8741.